Microsoft's proposed acquisition of Activison Blizzard is facing its biggest regulatory hurdle so far: a legal complaint issued by the US' Federal Trade Commission.
While the FTC does not have the authority to approve or disapprove any given merger, the legal proceedings kicked off by this complaint could ultimately lead to the deal being blocked by US courts.
The FTC has cited concerns over the potential for Microsoft to make the best-selling Call of Duty franchise exclusive to its own ecosystem – pointing to the company's decision to do the same with upcoming Bethesda titles such as Starfield – among other things. But the move is also part of a broader clampdown on massive tech mergers.
GamesIndustry.biz spoke to two legal experts, with Gamma Law managing partner David B. Hoppe observing that this complaint is in line with the FTC's "strategy of expanded antitrust enforcement."
"Part of this is to actively review so-called 'vertical' mergers, which involve companies that are not direct competitors, but are at different points in an industry stack," he explains. "Here, Activision could be viewed as a sort of 'supplier' to Microsoft, since it produces games that can be played on the Xbox. In the United States, vertical mergers have not had much attention in the past, since they were viewed in most cases as being favorable to consumers.
"The theory has been that integration of companies at different points in the value chain would lead to lower prices to consumers. However, it’s not clear that this has actually been the case. Plus, the current view among more liberal economists in the United States is that other factors should be considered beyond just whether a merger will result in higher costs. These other factors include the impact on innovation and labor markets, for example."
Richard Hoeg, managing partner of The Hoeg Law Firm, adds: "Candidly, I believe the primary motivation is the FTC’s increasing emphasis on aggressive enforcement of antitrust laws overall, and with respect to large technology companies in particular.
"Ostensibly, their biggest concerns are that Microsoft’s control of major AAA franchises – especially Call of Duty – would give them the ability and incentive to remove those franchises from rival platforms and allow them to unfairly monopolize hardware sales, subscription services, and cloud gaming."
Will the FTC win this legal battle?
Microsoft has been readying its defence somewhat publicly, with company president Brad Smith penning a piece for the Wall Street Journal about the vision behind the deal and Xbox boss Phil Spencer promising Call of Duty on Nintendo consoles and Steam for ten years if the deal is approved (although, as our own Chris Dring discussed, the latter is something of a sideshow).
"Many agencies are basically betting that a company will drop out based on the pressure they can exert with a complaint"Richard Hoeg, The Hoeg Law Firm
While many are skeptical about Microsoft's arguments in favour of the merger being approved, Hoeg believes it will still be difficult for the FTC to prevail in court.
"On the console side, making the case that [Microsoft] would have inordinate market power requires the FTC to claim that Nintendo and the massive success of the Switch is not a part of the relevant market they are looking at – this is a hard sell," he says.
"In respect of both subscription and cloud gaming, the FTC has to make the case that those markets are separate from the overall market of game distribution, which is likewise quite difficult given that both represent only different business models for the sale and presentation of the same goods. The fact that cloud gaming is not sold by Microsoft separately also blurs the lines.
"Finally, the fact that all of these questions are being posed regarding a company that is at least second if not third on the console sales spectrum (in given jurisdictions), makes Microsoft’s arguments more powerful. The FTC has a very tough case."
Hoppe, however, has less faith in Microsoft arguments, and says Smith's WSJ article was surprisingly weak: "He’s talking about cross-platform capability as if it was some revolutionary thing that Microsoft was going to bring to the world if they could buy Activision. Many WSJ readers and members of Congress will find that interesting. But as people who play games or work in the industry know, cross-platform is already here and it’s not going away, and publishers don’t need the platforms for this."
That said, he adds that ultimately the arguments most likely to decide the case will be based on precedents in antitrust law – and in that regard, the law is "not on [the FTC's] side."
What happens next?
We're approaching the end of of a two-week window in which Microsoft has to answer the FTC's complaint before the formal process truly begins. A hearing before an administrative judge at the FTC has already been scheduled for August 2023 – instantly pushing the deal beyond the June 2023 completion date both Microsoft and Activision were hoping for. Before this hearing, there will be various meetings and discussions between the parties involved, any of which could lead to a settlement (especially if Microsoft ends up offering concessions that allay the FTC's concerns).
If the case reaches the August hearing, the judge's decision could still be appealed by the FTC, Microsoft and/or Activision, which would move it to the US Court of Appeals and potentially all the way up to the US Supreme Court. Again, Microsoft could reach a settlement with the FTC at any point during this time, although Hoppe says the latter's commissioners "have indicated that they are skeptical of the value of such settlements."
"I would be surprised if there is not serious consideration given to canceling the deal"David B. Hoppe, Gamma Law
An additional complication, Hoeg observes, is the US Supreme Court is currently in the process of making a decision in the case of Axon Enterprise vs the FTC, which could challenge the ability of agencies like the FTC to handle adjudicative processes outside of the federal courts.
"If that goes as many expect it might, Microsoft may wind up with the ability to eject the process to federal court where they would expect to have a higher chance of success," he says.
All this is to say the dispute between the FTC and Microsoft/Activision is still in its very early stages, which makes it difficult to predict how it will turn out. Even so, both our legal experts believe Microsoft would defeat the FTC's complaint.
"To date it has been very difficult for the FTC to win these cases to stop vertical mergers," Hoppe explains. "The main reason is that courts have required the FTC to show harm to consumers. That may be mostly self-evident when the two companies are direct competitors, but it is very difficult in the case of a vertical merger.
"For example, whether or not Microsoft will provide Xbox users with exclusive release windows for Call of Duty will likely depend on a variety of factors that are unknown at this point. They may determine that it doesn’t make sense for different reasons, or market dynamics two or three years from now may be such that it doesn’t really matter anyway. So it’s hard to make the showing to a court that will convince them to intervene to stop a $69 billion transaction."
Hoeg adds: "If this went all the way to a court determination, I believe Microsoft would win. The trickier question is whether Microsoft will take this to the end of such a determination or bail out beforehand, particularly if the CMA [The Competition and Markets Authority, a UK regulator] and European Union move against it as well.
"These things take a lot of time, money, and resources, and many agencies are basically betting that a company will drop out based on the pressure they can exert with a complaint."
He adds that the 'penalty fee' Microsoft would pay for abandoning its acquisition of Activision Blizzard is due to increase in the next few months. At present, the Xbox firm would need to pay $2 billion to stop the deal before January 18, 2023, with this rising to $3 billion by April 18.
And, as Hoeg mentioned, there's the added complication of other regulators scrutinising the deal. Both the CMA and the EU are in the midst of an in-depth investigation, with the former already voicing multiple concerns over the potential harm for competition if the merger proceeds. While no regulator is adherent to the actions of others in separate jurisdictions, Hoeg says that "whatever political concerns the CMA or the EC might face on bringing an action are substantially lessened by the fact that the FTC has already moved on this."
Hoppe, meanwhile, believes it is "inevitable" this action by the FTC – and any developments in this process going forward – will impact the outcome in other jurisdictions, such as the UK and EU.
Will Microsoft acquire Activision Blizzard?
As has been the case since the acquisition was first announced in January, the question remains whether it will ultimately go through and Activision Blizzard will become part of Microsoft.
Hoppe believes the FTC complaint has significantly increased the costs and uncertainty associated with the deal, adding: "I would be surprised if there is not serious consideration given to canceling the deal and paying the breakup fee, if it would apply. If they do go ahead and don’t reach some interim settlement with the FTC, I think they would prevail. It’s possible they would even win in August of next year before the FTC’s own judge, which is what happened recently in another vertical merger case."
Hoeg concludes: "I’d personally like to see Microsoft proceed through the process as I think a final determination would benefit industry participant’s understanding of what is and will be allowed, but it’s not my money or time on the line. It’s almost entirely 50/50 in my eyes, and entirely dependant on what appetite Microsoft has to go through this whole thing."