The FTC’s suit against Microsoft has dire implications for the metaverse’s future

Not currently a dominant player in the gaming industry, Microsoft has made public commitments that it will assure competitors’ access to the Activision portfolio’s most popular game for the next 10 years. Building this case and fighting Microsoft’s army of lawyers will soak up precious FTC resources that are, by all accounts, stretched thin across a variety of other technology cases — including Meta’s proposed acquisition of a virtual reality fitness company.

The obvious question is, simply: Why bring the suit?

I believe that the case is not really about gaming per se. Ultimately, it’s about the future of competition in cloud computing, which is arguably the most important factor shaping the digital economy going forward.

First, let’s step back and examine the familiar reasoning: The word “game” may sound trivial, but the video game industry is, of course, massive — with over $180 billion in revenue last year and probably close to 3 billion players. That’s close to Facebook’s reach across the world. Antitrust cases are grounded in a definition of the relevant market, and no one should doubt that gaming is big enough to matter.

Within those statistics, the FTC has a legitimate concern that consumers would be worse off if products become increasingly siloed — for example, if Activision games could only be played on Microsoft’s Xbox or streaming game services (more on this channel later).

But Microsoft President Brad Smith recently explained that it would be irrational for Microsoft to restrict distribution in that manner. He argued that real money isn’t made off the consoles, but instead, the games; In other words, broader distribution means more money. The 10-year pledge of competitor access to “Call of Duty” — a $30 billion franchise over the last 19 years — tracks precisely with that logic.

Brad Smith. (Photo by Flickr user WSDOT, used via a Creative Commons license)

One expects these arguments in the normal give-and-take of competition policy debates. Going further against the FTC is the conventional view that vertical mergers (deals between companies that specialize in different parts of a value chain) are typically not viewed by courts with the same skeptical eye as horizontal mergers between direct competitors.

The FTC argues that Microsoft’s assurances about competitor access to “Call of Duty” cannot be trusted, based both on its interpretation of a previous acquisition involving ZeniMax Media and guarantees given to the European antitrust authorities. But if that’s what this is really about, surely the two sides could come to an agreement that firms up Microsoft’s pleas in ways that would satisfy the FTC’s concerns.

I see larger issues at play that attach to FTC chair Lina Khan’s guiding view of competition policy as a tool — not just to avoid consumer harm, but to actively shape future markets. In that context, even without the formal FTC complaint emphasizing it, we should be talking more about what the deal means at the intersection of the metaverse and the cloud — two of the most important future technology markets that are joined at the hip.

And this is where restraining Microsoft makes excellent sense

It’s worth noting that the metaverse-cloud connection is a major part of what Microsoft and Activision’s CEOs cited when discussing the merger with investors. Console vs. game economics, bundling and hardware-software walled gardens are also part of the discussion. But more important than any of these is the Xbox Game Pass streaming service that resides in the Azure cloud.

Smith touts the consumer advantages as a modern-day analogy to what it meant when video streaming replaced the trip to Blockbuster: Wouldn’t the customer be better off with similar access to games?

Yes, of course. But what goes unsaid in this streaming vision is the promise of supercharging the future for Azure. Streaming games is a guaranteed source of sophisticated demand for the Microsoft cloud and will harness the power of the company’s data centers.  Together, it’s a recipe to feed the company’s digital world-building capacity. That’s exactly what will make the metaverse so compelling beyond the gaming realm, too.

Lina Khan. (Photo by Flickr user E Gillet, used via a Creative Commons license)

The boundary between what we today call “games” and “enterprise applications” is getting fuzzier. Both depend on massive data engineering capacity and will increasingly use machine learning, which is being integrated into cloud service providers’ offerings, as a service. Both will also feed and be fed by newly emerging and fast-improving generative AI capabilities; a system like ChatGPT will soon just as easily write a script for a new scene in a game as it will script advertising copy or customer service emails for a fashion business.

Even at the user interface level, games and enterprises are converging in the metaverse. Imagine a virtual meeting room that has the beautiful detail and deep interactivity that you now see in a top-tier video game, as compared to what you today see in Horizon Workrooms. That’s the cloud and metaverse’s future promise.

Sound futuristic and speculative? Perhaps so

But, notably, Microsoft has not offered to make “Call of Duty” available on Sony’s game streaming services, in addition to its promises about the PlayStation console.

Competition policy lawyers and judges will continue to argue about whether shaping future markets in this way is a legitimate objective for government intervention. Khan has a clear view on that — and win or lose, in this particular case, I believe she’s trying to make a point about the future of the metaverse and cloud service competition that will enable it.

Bringing this case speaks loudly about that vision and how the FTC suspects Microsoft of undermining competition. The world should pay much greater attention.

This guest post is a part of Technology of the Future Month 2022 in Technical.ly's editorial calendar. This month’s theme is underwritten by Verizon 5G. This story was independently reported and not reviewed by Verizon 5G before publication.