Microsoft is facing a “historic battle” to save the Activision Blizzard deal

If Microsoft thought it had found a way to mollify Washington and insulate itself from the regulatory backlash plaguing Big Tech, it had just sobered up.

Thursday’s legal challenge filed by the Federal Trade Commission against the software company’s $75 billion purchase of gaming company Activision Blizzard represents the first direct regulatory threat to the US software giant in more than two decades. As UK and EU competition authorities ramp up their own investigations, they have threatened to unleash a wave of actions that could unravel the gaming industry’s biggest deal.

The FTC’s intervention, under the direction of Chair Lena Khan, is also one of the first clear signs that regulators will try to stop America’s biggest tech companies from expanding their empires through acquisitions — even when deals appear to be going muster. Under most traditional antitrust analyzes.

“This is the most significant merger challenge that the Biden administration’s antitrust agencies have presented to date,” said William Kovacic, a former FTC chair. It is set to be the “historic battle” that will determine “management’s commitment to implementing a tougher approach to merger control and to big technology companies in particular,” he added.

The action threatens a cautious attempt by Microsoft to distance itself from past antitrust battles that took years in the making. Brad Smith, the company’s longtime chief attorney and chairman, has become a staple in Washington and Brussels, as the firm has sought to create a stark contrast between its own business practices and its Big Tech competitors.

In announcing the deal early this year, Microsoft was doing its best to position itself as a more “open” competitor to what it argued were the restrictive smartphone worlds of Google and Apple, aligning with proposed legislation in Washington that would force its rivals to open up. in their mobile app stores.

It has also sought to portray itself as a smaller competitor to gaming giant Sony, maker of what it called the “dominant” PlayStation, and Tencent’s massive mobile games business in China.

The depth of Microsoft’s failure was evident in the hawkish international regulatory consensus that was forming against the Activision deal. The FTC’s arguments have closely echoed the UK’s Competition and Markets Authority, which recently opened a Phase II investigation.

Regulators’ chief complaint is the risk of Microsoft making Activision games exclusive to its Xbox, hitting rival console makers. Plenty of attention Call of dutya game that grossed over $30 billion in revenue at its 19-year-old age.

Smith wrote in a commentary in The Wall Street Journal earlier this week that it would be “economically irrational” for Microsoft to take Activision games away from competing consoles. Besides cutting off the source of revenue, he said, this would prevent “crossplay” that lets players on different devices join multiplayer games, something that would make Call of duty Less attractive to all players.

The Federal Trade Commission has rejected arguments like this before. US chipmaker Nvidia made a similar case when it tried to buy SoftBank-owned Arm’s chip design suite two years ago, claiming that its economic interest lay in continuing to make Arm’s designs freely available to others. She gave up the takeover when regulators on both sides of the Atlantic refused to accept her assurances.

To bolster its case, Microsoft has improved the terms of an earlier offer by saying it will Call of duty Available for up to 10 years on competing consoles. Nintendo accepted the offer earlier this week, giving Microsoft a push as it has before the Federal Trade Commission (FTC) reaches its peak. But Sony refused to budge.

In a partially redacted legal complaint issued late Thursday, the FTC said Microsoft has made similar assertions before and failed to follow up on them. Microsoft said, upon its purchase of gaming company ZeniMax last year, that it told the EU it would have no incentive to withhold the company’s games from competing consoles, only to reverse course after the deal went through.

In another echo of UK regulators’ reservations about the deal, the FTC said it would give Microsoft an unfair advantage in the new market for game subscriptions. This may be a stronger part of regulators’ case than arguments over exclusivity, said Joost Rietveld, an associate professor at University College London who specializes in platforms and games. “It puts them in a position to dominate the sector,” he said.

Like the UK’s CMA, US regulators have also said that owning Activision games could help Microsoft dominate the emerging market for cloud gaming — giving it the chance to drive a new streaming market in the same way Netflix did for video. However, cloud gaming is only a small part of the industry, which weakens that part of the issue, according to Rietveld.

The FTC’s expansive approach will face some serious tests. Its case against Microsoft came the same day a US court heard the agency’s request for an injunction against another deal, Meta’s purchase of VR app company Inside.

If the court rejects the FTC’s argument in this case, “it would be another indication that the agencies are overly aggressive in their efforts, far more than applicable antitrust case law,” said one senior M&A attorney.

But the complaint issued Thursday could serve as a launching pad for broader international action against the Activision deal. Kovacic said the FTC’s action “could have the effect of emboldening other authorities” investigating the deal in London and Brussels, neutralizing the risk that any action it takes against Microsoft would be viewed as “protective criticism of American companies.”

The agency case will not be heard until August. Long before that, at the end of April at the latest, the UK authorities are due to deliver their verdict. For Microsoft’s efforts to become a much larger force in the gaming world, dark clouds are beginning to gather.

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