Microsoft Acquisition of Activision Blizzard: The United States Federal Trade Commission has filed a formal complaint against Microsoft, posing the company’s toughest regulatory challenge to date with the proposed acquisition of Activision Blizzard.
Despite the FTC’s lack of jurisdiction, this complaint has triggered legal proceedings that could ultimately result in the purchase being stopped by US courts.
The FTC has expressed concern that Microsoft may attempt to make the popular Call of Duty series exclusive to its own ecosystem, citing the company’s previous choice to do the same with upcoming Bethesda titles like Starfield. However, this action is a part of a larger effort to restrict excessively large mergers in the technology sector.
— James Batchelor (@James_Batchelor) December 14, 2022
Microsoft Acquisition of Activision Blizzard
According to two attorneys GamesIndustry.biz interviewed, this case is in line with the FTC’s “policy of expanding antitrust enforcement.”
Specifically, he says, “part of this is to actively evaluate so-called’vertical’ acquisitions, which involve companies that are not direct competitors, but are at various locations in an industry stack.” The company Activision makes games for the Xbox, hence it might be considered a “supplier” to Microsoft in this case. Vertical mergers in the United States have historically received little scrutiny because they are often seen as beneficial to consumers.
It has been hypothesized that if businesses along the value chain worked together, they could pass savings on to customers. There is some doubt as to whether or not this has been the case. More liberal U.S. economists now think that additional considerations than whether a merger will lead to greater prices should be taken into account. The effects on things like creativity and the job market are among these “other elements.”
Attorney and managing partner of The Hoeg Law Firm Richard Hoeg elaborates, saying, “Honestly, I believe the fundamental motivation is the FTC’s increasing emphasis on aggressive enforcement of antitrust rules overall, and with respect to large technological businesses in particular.”
Apparently, they are most worried about Microsoft’s monopolization of hardware sales, subscription services, and cloud gaming because of the company’s ownership of several important AAA properties, most notably Call of Duty.
Microsoft Needs to Play Activision Out
Phil Spencer, CEO of videogaming at Microsoft, had told The Wall Street Journal, “We have to break that duopoly” of two storefronts controlling the mobile market
— Roberto Serrano' 🇺🇦☮️🙏🏻 | 📊🎮🍿 (@geronimo_73_) December 14, 2022
Will the Ftc Prevail in Court?
Xbox executive Phil Spencer has promised Call of Duty for ten years on Nintendo platforms and Steam if the deal is approved, while Microsoft president Brad Smith has written an article for the Wall Street Journal explaining the concept behind the arrangement (although, as our own Chris Dring discussed, the latter is something of a sideshow).
Although many people are dubious of Microsoft’s arguments in favor of the merger being authorized, Hoeg thinks the FTC still has a good chance of winning in court. The FTC’s contention that Nintendo and the Switch‘s huge success are not a part of the relevant market they are looking at is “a hard sell,” he argues because it would undermine the notion that Microsoft would have undue market power in the console industry.
Given that subscription and cloud gaming are only alternative business models for selling and presenting the same commodities, it is also difficult for the FTC to argue that these marketplaces are distinct from the general market of game distribution. This fuzziness is exacerbated by the fact that Microsoft does not provide cloud gaming as a stand-alone product.
Microsoft’s claims carry more weight because they are directed at a firm that ranks second or third in console sales (depending on the jurisdiction). For the FTC, this is an extremely challenging case.
Hoppe, on the other hand, is not as convinced by Microsoft’s claims and finds Smith’s WSJ article to be shockingly weak: “He’s talking about cross-platform capacity as if it were some new thing that Microsoft was going to offer to the world if they could buy Activision.
That will pique the curiosity of many WSJ readers and legislators. But gamers and professionals in the business know that cross-platform gaming is here to stay; publishers don’t need the platforms to facilitate it.
However, he adds that antitrust law precedents will ultimately be the strongest arguments and that the law is “not on [the FTC’s] side” in this regard.
So, What Comes Next?
Microsoft has just under two weeks to respond to the FTC’s complaint before the formal procedure begins. Despite Microsoft and Activision’s best efforts, the merger is unlikely to close by June 2023, when they originally anticipated. This is because a hearing before an FTC administrative judge has already been scheduled for August 2023.
There will be numerous meetings and conversations between the parties involved prior to this hearing, and any of them could result in a settlement (especially if Microsoft ends up giving concessions that satisfy the FTC’s worries).
The FTC, Microsoft, and/or Activision could still appeal the judge’s judgment if the matter reaches the August hearing, taking the case to the US Court of Appeals and possibly even the US Supreme Court. Once again, Microsoft and the FTC could reach a settlement at any time during this period, while Hoppe claims that FTC commissioners “have signaled that they are suspicious of the utility of such deals.”
According to Hoeg, the situation is further complicated by the fact that the United States Supreme Court is currently deliberating over a case involving Axon Enterprise vs. the Federal Trade Commission, which threatens the authority of agencies like the FTC to handle adjudicative processes outside of federal courts.
This might provide Microsoft the opportunity to move the case to federal court, where they “would anticipate to have a stronger chance of winning,” he argues.
This means that it is now very difficult to predict the outcome of the case between the FTC and Microsoft/Activision. Nevertheless, our lawyers are certain that Microsoft will prevail against the FTC’s allegations.
To prevent vertical mergers, “to date it has been quite difficult for the FTC to win these lawsuits,” Hoppe says. For starters, the law requires the FTC to demonstrate consumer harm before taking action. This may be obvious when the merging companies are direct rivals, but in the case of a vertical merger, this can prove to be a formidable challenge.
A number of criteria, some of which are currently unknown, may determine, for instance, whether or not Microsoft would provide Xbox customers with exclusive release windows for Call of Duty. It’s possible that they’ll decide it’s not worth it for one reason or another, or that market conditions in two or three years would render it moot. Therefore, it is difficult to provide the facts necessary to persuade a court to intervene to prevent a $69 billion transaction.
I like that this story breaks out of the reductive "Lina Khan vs. Big Tech" framing. As @leah_nylen makes clear, the push to revive antitrust is about the whole economy— from hospitals to rocket ships to sporting goods. https://t.co/YIlj2oPGer
— Gilad Edelman (@GiladEdelman) December 15, 2022
Even more so, Hoeg says, “If this went all the way to a judicial ruling, I believe Microsoft would win.” If the Competition and Markets Authority (a UK regulator) and the European Union also take action against Microsoft, the more difficult question is whether or not Microsoft will see this through to the end of such a determination or bail out earlier.
It’s been said that “many agencies are effectively banking that a corporation would drop out based on the pressure they can exert with a complaint” because of the effort and expense involved.
He also notes that the amount of the ‘penalty charge’ Microsoft would have to pay if it decided to back out of its acquisition of Activision Blizzard is expected to rise in the coming months. The Xbox company would need to pay $2 billion before January 18, 2023, and $3 billion by April 18 to get out of the arrangement.
Hoeg also brought out the additional difficulty posed by other regulators looking into the transaction. The CMA and the EU are both conducting in-depth investigations, with the former having expressed several concerns over the possible harm to competition if the merger goes forward.
Hoeg argues that “any political issues the CMA or the EC would face on taking an action are greatly mitigated by the fact that the FTC has already moved on this,” despite the fact that no regulator is bound by the actions of others in different jurisdictions.
However, Hoppe thinks it is “inevitable” that the FTC’s intervention, and any further developments in this process, will affect the decision in other jurisdictions like the UK and EU.
Microsoft’s possible takeover of Activision Blizzard.
The question of whether Activision Blizzard would become a part of Microsoft has persisted since the deal was first disclosed in January.
Hoppe says, “I would be shocked if there is not serious thought given to canceling the acquisition and paying the breakup fee if it would apply,” because the FTC case has greatly raised the expenses and uncertainty connected with the deal. Without an interim deal with the FTC, I believe they would be successful if they went ahead with their plans. The FTC’s own court ruled in favor of the defendant in a recent vertical merger case, so it’s feasible that they may win in August of next year.
#Antitrust partner Paul Swanson was quoted in @WSJ’s article, “FTC’s Tussle with Microsoft Puts Cloud Gaming in the Spotlight”–commenting on #FTC’s conservative approach to the #CloudGaming market share distribution. Subscribers read here: https://t.co/77G6kbnhLv #GamingIndustry pic.twitter.com/NViZ4syaA0
— Holland & Hart LLP (@HollandHart) December 13, 2022
Hoeg continues, “It’s not my money or time on the line, but I’d personally prefer to see Microsoft proceed through the process as I think a final ruling will help industry participants grasp what is and will be authorized.” In my opinion, the odds are practically even, and everything hinges on Microsoft’s appetite for this ordeal.
Frequently asked questions
Why is the FTC suing Microsoft?
The FTC is disputing LinkedIn’s parent firm Microsoft’s $69 billion offer to acquire video game industry behemoth, Activision Blizzard. After weeks of rumored conversations between the FTC, Microsoft, and Sony, the agency has filed suit claiming that the transaction will reduce competition in the gaming sector.
Was Microsoft blocked from buying Activision?
The United States government has taken action to prevent a merger between Microsoft and Activision Blizzard. The US Federal Trade Commission (FTC) has taken steps to prevent Microsoft’s proposed acquisition of video game publisher Activision Blizzard, on the grounds that it would reduce competition by limiting the availability of popular games to other publishers.
What is Microsoft gonna do with Activision?
As a result of the acquisition, Microsoft would become the sole owner of several popular video game brands, including the Call of Duty, World of Warcraft, and Candy Crush series. It also establishes Microsoft Gaming, which will be headed by Phil Spencer, currently the director of Microsoft’s Xbox division.
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