Microsoft’s proposed acquisition of Activison Blizzard faces its biggest regulatory hurdle yet: a legal complaint from the US Federal Trade Commission.
While the FTC does not have the authority to approve or deny any particular merger, the legal proceedings initiated under this complaint could ultimately result in the transaction being blocked by US courts.
The Federal Trade Commission has expressed concerns about the possibility of Microsoft making the best-selling Call of Duty franchise exclusive to its ecosystem — citing the company’s decision to do the same with upcoming Bethesda titles like Starfield — among other things. But the move is also part of a broader crackdown on massive tech mergers.
GamesIndustry.biz Speaking to two legal experts, with Gamma Law managing partner David B. Hoppe noting that this complaint is in line with the FTC’s “Strategy for Expanded Antitrust Enforcement.”
“Part of this is actively reviewing so-called ‘vertical’ mergers, which involve companies that are not direct competitors, but are at different points in an industry group,” he explains. Here, Activision can be seen as a kind of ‘supplier’ to Microsoft, since it produces games that can be played on Xbox. In the US, vertical mergers haven’t gotten much attention in the past, in most cases being viewed as favorable to consumers.
The theory has been that the integration of firms at different points in the value chain will lead to lower prices for consumers. However, it is not clear whether this is actually the case. In addition to the current view among more liberal economists in the United States is that other factors should be considered. Others go beyond just whether a merger will drive up costs. These other factors include the impact on innovation and labor markets, for example.”
Richard Hoeg, Managing Partner of Hoeg Law Firm, adds: “Frankly, I think the primary driver is the FTC’s increased focus on strict enforcement of antitrust laws in general, and with respect to big tech companies in particular.
Ostensibly, their biggest fear is that Microsoft’s control of major AAA franchises – especially Call of Duty – will give them the power and incentive to remove those franchises from competing platforms and allow them to unfairly monopolize hardware sales, subscription services, and cloud gaming.
Will the FTC win this legal battle?
Microsoft has been preparing to defend it somewhat publicly, with company president Brad Smith writing an article for the Wall Street Journal about the vision behind the deal, and Xbox chief Phil Spencer promising Call of Duty on Nintendo consoles and Steam for ten years if the deal is approved ( Although, as Chris Dring has discussed, the latter is a bit of a sideshow).
“Many agencies are basically betting on a company pulling out based on the pressure they can apply with the complaint.”
Richard Hogg, Hogg Law Firm
While many are skeptical of Microsoft’s arguments in favor of approving the merger, Hoeg believes it will still be difficult for the FTC to prevail in court.
on the console side, which makes the case [Microsoft] It would have excessive market power that would require the FTC to claim that Nintendo and the massive success of the Switch is not part of the relevant market they’re looking at — and that’s a hard sell,” he says.
“Regarding both subscription and cloud gaming, the FTC has to prove that these markets are separate from the general market for game distribution, which is also difficult given that they both just represent different business models for selling and offering the same merchandise, and the fact that Microsoft does not specifically sell cloud gaming. Separate blurs fonts.
“Finally, the fact that all of these questions are being asked in relation to a company that ranks at least second if not third in the range of console sales (in the given jurisdictions), makes Microsoft’s arguments even more compelling. And the FTC has a very difficult case.”
Hobby, however, has less confidence in Microsoft’s arguments, and says Smith’s WSJ article was surprisingly thin: “It talks about cross-platform capability as if it was something revolutionary that Microsoft would bring to the world if they could buy Activision. It would find many From WSJ readers and members of Congress this is interesting. But as people who play games or work in the industry know, cross-platforms are already here and they’re not going away, and publishers don’t need the platforms for this.”
However, he adds, the arguments likely to ultimately decide the case will be based on precedents in antitrust law — and in that regard, the law is “not at all [the FTC’s] side.”
what happened after that?
We’re nearing the end of a two-week window during which Microsoft has to respond to the FTC’s complaint before the official process can actually begin. A hearing before an FTC administrative judge was scheduled for August 2023 — immediately pushing the deal beyond the June 2023 completion date that both Microsoft and Activision had hoped to achieve. Prior to 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 making concessions that allay FTC concerns).
If the case reaches a hearing in August, the judge’s decision could still be appealed by the Federal Trade Commission, Microsoft and/or Activision, which will take it to the US Court of Appeals and possibly all the way to the US Supreme Court. Again, Microsoft could come to a settlement with the FTC at any time during this time, though Hobby says the latter’s commissioners “have indicated that they are skeptical of the value of such settlements.”
“I would be surprised if no serious consideration was given to canceling the deal.”
David B. Hoppe, Gamma Law
An additional complication, Hoeig notes, is that the US Supreme Court is currently in the process of deciding Axon Enterprise vs FTC, which could challenge the ability of agencies like the FTC to handle court proceedings outside of federal courts. .
“If things go as many expect, Microsoft may end up with the ability to take the process to federal court where they expect to have a higher chance of success,” he says.
All of this means that the dispute between the FTC and Microsoft/Activision is still in its infancy, which makes it difficult to predict how it will play out. However, both of our legal experts believe that Microsoft will fail the FTC’s complaint.
“So far, it’s been very difficult for the FTC to win these cases to stop vertical mergers,” Hoppe explains. “The main reason is that the courts have required the FTC to show the harm to consumers. That may often be 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 Call of Duty release frames is likely to depend on a variety of factors that are unknown at this point. They may decide it doesn’t make sense for various reasons, or it could be market dynamics. Two or three years from now that doesn’t really matter anyway. So it’s hard to take the offer to a court that will convince them to step in to stop the $69 billion deal.”
And Hoeg adds: “If this comes to a court decision, I think Microsoft will win. The tougher question is whether Microsoft will take this to the end of such a decision or bail it out beforehand, especially if it’s a CMA.” [The Competition and Markets Authority, a UK regulator] The European Union is also moving against it.
“These things take a lot of time, money, and resources, and many agencies are basically betting that a company will pull out based on the pressure they can apply when they file a complaint.”
He adds that the “fining fee” that Microsoft will pay for relinquishing its acquisition of Activision Blizzard will increase in the next few months. Currently, Xbox will need to pay $2 billion to close the deal before January 18th, 2023, with that amount rising to $3 billion by April 18th.
And as Hoeig mentioned, there is the added complication of having other regulators scrutinize the deal. Both the CMA and the EU are in the midst of an in-depth investigation, with the former already expressing multiple concerns about potential harm to competition if the merger proceeds. While no regulator is bound by the actions of others in separate jurisdictions, Hoeg says that “whatever political concerns a money market authority or the European Commission might have about taking action are greatly reduced by the fact that the FTC has I really moved on that.”
Meanwhile, Hoppe believes it is “inevitable” that this action by the FTC – and any developments in this process in the future – will affect the outcome in other jurisdictions, such as the UK and the 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 eventually take place and Activision Blizzard will become part of Microsoft.
Hoppe believes the FTC complaint led to a significant increase in costs and uncertainty associated with the deal, adding, “I would be surprised if canceling the deal and paying a termination fee, if it did, weren’t seriously considered. If they go ahead and don’t come to an interim settlement.” With the FTC, I think they will prevail. They will probably win in August of next year before an FTC judge, which they did recently in another vertical merger case.”
Hoeg concludes, “Personally I’d like to see Microsoft move through the process because I believe the final decision will benefit industry participants understanding what is and isn’t allowed, but it’s not my money or time that’s at stake. It’s almost 50/50 in my eyes, and it totally depends.” On the appetite that Microsoft has to go through this whole thing.”
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