The news of the layoffs was stunning: Three months after consummating its $68 billion acquisition of Activision, Microsoft fired 1,900 employees in its gaming division. The relevant question, from a policy perspective, is whether these terminations reflect the exercise of newfound buying power made possible by the merger? If so, then Microsoft may have just unwittingly exposed itself to antitrust liability, as mergers can be challenged after the fact in light of clear anticompetitive effects.
The Merger Guidelines recognize that mergers in concentrated markets can create a presumption of anticompetitive effects. When studying the impact of a merger on any market, including a labor market, the starting place is to determine whether the merged firm collectively wielded market power in some relevant antitrust market. That inquiry can be informed with both direct and indirect evidence.
Direct evidence of buying power, as the name suggests, is evidence that directly shows a buyer has power to reduce wages or exclude rivals. Indirect evidence of buying power can be established by showing high market shares (plus entry barriers) in a relevant antitrust market. It bears noting that, when it comes to labor markets, high market shares are not strictly needed to infer buying power due to high search and switching costs (often absent in output markets).
Beginning with the direct evidence, Activision exhibited traits of a firm with buying power over its workers. For example, before it was acquired, Activision undertook an aggressive anti-union campaign against its workers’ efforts to organize a union. Moreover, workers at Activision complained about their employer’s intransigent position on granting raises, often demanding proof of an outside offer. A recent article in Time recounted that “Several former Blizzard employees said they only received significant pay increases after leaving for other companies, such as nearby rival Riot Games, Inc. in Los Angeles.” Activision also entered a consent decree in 2022 with the Equal Employment Opportunity Commission to resolve a complaint alleging Activision subjected its workers to sexual harassment, pregnancy discrimination, and retaliation related to sexual harassment or pregnancy discrimination.
Moving to the indirect evidence, one could posit a labor market for video game workers at AAA gaming studios. Both Microsoft and Activision are AAA studios, making them a preferred destination for industry labor. Independent studios are largely regarded as temporary stepping stones toward better positions in large video game firms.
To estimate the merged firm’s combined share in the relevant labor market, in a forthcoming paper, Ted Tatos and I study CareerBuilder’s Supply and Demand data, filtering on the term “video game” in the United States to recover job applications and postings over the last two years. The table summarizes the results of our search in the Spring 2022, a few months after the Microsoft-Activision deal was announced. Our analysis conservatively includes small employers that workers at a AAA studio such as Activision likely would not consider to be a reasonable substitute.
Job Postings Among Top Studios in Video Game Industry – CareerBuilder Data
|Number of Job Postings
|Percent of Postings
|Activision Blizzard, Inc.
|Electronic Arts Inc.
|Rockstar Games, Inc.
|Zenimax Media Inc.
|Epic Games, Inc.
|Wb Games Inc.
|Riot Games, Inc.
|2k Games, Inc.
|Complete Networks, Inc.
|Digital Extremes Ltd
|Naughty Dog, Inc.
|Mastery Game Studios, LLC
|Crystal Dynamics Inc
As indicated in the first row, Activision lies at the top in number of job postings in the CareerBuilder data, with 26.0 percent. Prior to the Activision acquisition, Microsoft accounted for 3.1 percent of job postings (the sum of Zenimax Media and Microsoft rows). Based on these figures, Microsoft’s acquisition of Activision significantly increased concentration (by more than 150 points) in an already concentrated market (post-merger HHI above 1,200). This finding implies that the merger could lead to anticompetitive effects in the relevant labor market, including layoffs.
It bears noting that the HHI thresholds established in the 2023 Merger Guidelines (Guideline 1) were most likely developed with product markets in mind. Indeed, the Guidelines recognize in a separate section (Guideline 10) that labor markets are more vulnerable to the exercise of pricing power than output markets: “Labor markets frequently have characteristics that can exacerbate the competitive effects of a merger between competing employers. For example, labor markets often exhibit high switching costs and search frictions due to the process of finding, applying, interviewing for, and acclimating to a new job.” High switching costs are also present in the video game industry: Almost 90 percent of workers at AAA studios in the CareerBuilder Resume data indicate that they did not want to relocate, making them more vulnerable to an exercise of market power than the HHI analysis above implies.
As any student of economics recognizes, a monopsonist not only reduces wages below competitive levels, but also restricts employment relative to the competitive level. So the immediate firing of 1,900 workers is consistent with the exercise of newfound monopsony power. In technical terms, the layoffs could reflect a change in the residual labor supply curve faced by the merged firm.
Why would Microsoft exercise its newfound buying power this way? To begin, many Microsoft workers, prior to the merger, could have switched to Activision in response to a wage cut. Indeed, we were able find in the CareerBuilder data that a substantial fraction of former Microsoft workers left Microsoft Game Studios to work for Activision. (More details on the churn rate to come in our forthcoming paper.) Post-merger, Microsoft was able to internalize this defection, weakening the bargaining position of its employees, and putting downward pressure on wages. In other words, Microsoft is more disposed to cutting Activision jobs than would a standalone Activision. Moreover, by withholding Activision titles from competing multi-game subscription services—the FTC’s primary theory of harm in its litigation, now under appeal—Microsoft can give an artificial boost to its platform division. This input foreclosure strategy would compel Microsoft to downsize its gaming division and thus its gaming division workers.
Alternative Explanations Don’t Ring True
The contention that these 1,900 layoffs flowed from the merger, as opposed to some other force, is supported in the economic literature in other labor markets. A recent paper by Prager and Schmitt (2021) studied the effect of a competition-reducing hospital merger on the wages of hospital staff. Consistent with economic theory, the merger had a substantial negative effect on wages for workers whose skills are much more useful in hospitals than elsewhere (e.g., nurses). In contrast, the merger had no discernable effect on wages for workers whose skills are equally useful in other settings (e.g., custodians). As Hemphill and Rose (2018) explain in their seminal Yale Law Journal article, “A merger of competing buyers can exacerbate the merged firm’s incentive to buy less in order to drive down input prices.”
Microsoft has its defenders in academia. According to Joost van Dreunen, a New York University professor who studies the gaming business, the video game industry is “suffering through a winter right now. If everybody around you is cutting their overhead and you don’t, you’re going to invoke the wrath of your shareholders at some point.” (emphasis added) This point—which sounds like it was fed by Microsoft’s PR firm—is intended to suggest that the firings would have occurred absent the merger. But there are two problems with this narrative. First, Microsoft’s gaming revenues are booming (up nine percent in the first quarter of its 2024 fiscal year), which makes industry comparables challenging. What were the layoffs among video game firms that also grew revenues by nine percent? Second, video programmers and artists are not “overhead,” such as HR workers or accountants. (Apologies to those workers.) Thus, their firing cannot be attributed to some redundancy in deliverables.
Microsoft’s own press statement about the layoffs vaguely states that it has “identified areas of overlap” across Activision and its former gaming unit. But that explanation is just as consistent with the labor-market harm articulated here as with the “eliminating redundancy” efficiency.
Bobby Kotick, the former CEO of Activision, received a $400 million golden parachute at the end of the year for selling his company to Microsoft. That comes to about $210,500 per fired employee, or about two years’ worth of severance for each worker laid off. Too bad those resources were so regressively assigned.