Late on Thursday, both Microsoft and Activision Blizzard King filed their responses to the administrative complaint the Federal Trade Commission (FTC) brought against the $69B merger two weeks ago. On December 8, the U.S. federal government agency decided to sue for the sake of suing, meaning that neither was there a need (given the acquirer's willingness to address any potential concerns) nor a case (investors certainly weren't impressed). Instead of filing a complaint with a federal district court, the FTC opted for an "adjudicative proceeding" before its own in-house judge. The response deadline is two weeks from formal service, which may have occurred the day the FTC made its decision.
Way past East Coast office hours, the parties' responsive pleadings were not yet available on the FTC's website, but showed up on the Internet (particularly CNBC). For convenience, let me show the two documents first and then compare them:
Each complaint has three parts: introduction, item-by-item denials and admissions, and (partly affirmative) defenses. The introductory parts are where the two answers to the complaint differ the most. If one wanted to use the old "good cop, bad cop" analogy, Microsoft would be the former and Activision Blizzard the latter. That categorization would be justifiable, but it's more instructive--and more fitting in this context--to draw analogies to famous games:
Microsoft's filing is sweet and strategic like Candy Crush:
As we've heard from Microsoft ever since the announcement of the deal (almost a year ago), it is primarily about Microsoft becoming a major mobile game publisher (and, through a third-party app store, distributor, though some other jurisdictions may be ahead of the United States in that regard after Congress just failed to pass the Open App Markets Act into law).
Microsoft's counsel from Wilkinson Stekloff and Weil Gotshal & Manges does take firm positions on the legal and factual questions in the case (and makes it pretty clear that the FTC is protecting a competitor--Sony--as opposed to the competitive process), but stops short of being exceedingly combative. It's the "sweet" non-bridge-burning way to strongly disagree with a government agency.
It reads like someone strategically arranging candies of the same color in a row and then watching the whole thing implode.
Activision Blizzard King's filing is frontal assault like Call of Duty:
The introductory part of ABK's answer to the complaint (lead counsel: Skadden's Steven Sunshine) is replete with take-no-prisoners mince-no-words rhetoric like "ideologically-fueled", "facially absurd", "made up", "entirely nonsensical", "wildest supposition", "contrived", "turning antitrust on its head", "[b]linded by ideological skepticism of high-value technology deals", "lost sight of the realities". I was pleased to see that ABK called the FTC's proffered market definitions "gerrymandered" just like I did in my analysis of the agency's complaint two weeks ago. It shows that this is a natural conclusion.
Make no mistake: it's not just noise. They take aim at the different targets, as precisely as a sniper, and strike down one after the other.
There are good reasons for which the two companies strike a different tone. All that Activision Blizzard King wants to do is close the deal. Then ABK will cease to exist as an independent entity, and Microsoft will be in charge, which is why it's up to Microsoft to negotiate a potential settlement based on commitments it would make. Yesterday the New York Times published an interesting article on Microsoft's approach, Microsoft Gambles on ‘Nice Guy’ Strategy to Close Activision Megadeal. The NYT notes that Microsoft can't just let the FTC block any of its deals as it may want to make more acquisitions, but strives to be constructive. When I read that headline, I can think of another headline I'd like to--but at least in the foreseeable future probably won't--see: "Apple Gambles on 'Nice Guy' Strategy to Open its App Store" There is a stark contrast now between Apple--which uses fake app developers as well as fake labor unions--and Microsoft--which is reasonably aligned with the Communications Workers of America (CWA) labor union as well as the AFL-CIO umbrella organization (which totally supports the deal).
Back to the Microsoft-Activision comparison:
To the extent that the middle sections of the answers to the complaint differ, it's mostly because the parties have different knowledge. Microsoft can comment more specifically on its Xbox gaming division and plans, while ABK is in the best position to talk about what it would do in a "but-for" scenario where it would stay independent, such as that there simply wouldn't be any of its games on any subscription services anytime soon (while Microsoft's cross-platform Xbox strategy is to make more games available to more gamers as they call it).
The defenses are identical, and while large parts of them were to be expected, they must have been coordinated between the parties' lawyers. We may see a motion to dismiss fairly soon as the parties have identified legal deficiencies, including but not limited to market definition. But looking beyond an adjudicative proceeding (should the FTC see it through instead of working things out along the way), the parties clearly also reserve their constitutional rights, particularly under Article II (separation of powers, unaccountability of FTC), Article III (access to an independent federal judge), and the Fifth Amendment (due process). The FTC is taking some risks here. Its in-house adjudicative proceedings are somewhat controversial, and the Supreme Court is now working on its Axon Enterprise, Inc. v. Federal Trade Commission opinion. In that case, the key issue is whether constitutional challenges to the FTC's structure, procedures, and very existence--all of which are referenced in Microsoft's and Activision Blizzard King's responsive pleadings--can be brought in district court.
At some point the FTC would have to sue in district court anyway: whenever they feel the time has come to seek a preliminary injunction. Otherwise the parties could just close the deal. I have serious doubts as to the FTC's ability to satisfy the requirements for a PI, above all the likelihood of success on the merits. And a federal district court--the United States District Court for the Northern District of California (barring a hypothetical venue transfer)--will soon have to decide on a PI motion concerning the deal, but one that was brought by class-action lawyers whose pursuit of fees is a sideshow that could, however, further weaken the FTC.
As some commentators have noted, the FTC may also become more receptive to an amicable resolution should there be consent decrees in other jurisdictions--particularly in Europe, where antitrust laws tend to be stricter than in the U.S., and where regulators have repeatedly been accused by U.S. officials and companies of protecting competitors rather than competition, which is precisely what the FTC now appears to be doing. I was unhappy when a European Commission official gave the impression of doing one of the things Microsoft and Activision say the FTC has done ("prejudged the case"), but still believe that the EC's Directorate-General for Competition (DG COMP) is likely to arrive at a realistic assessment of the transaction. And in the UK I found it interesting that public comments on the merger were overwhelmingly positive (in that post I explain why that evaluation of submissions by members of the public should neither be overrated nor underestimated, much less ignored).
The answers to the complaint are unlikely to have surprised the FTC, but the FTC's decision makers should still think about whether it is a good idea--even if there could be indirect benefits such as another argument for new antitrust legislation--to complicate a U.S.-U.S. deal when, as Activision Blizzard's answer to the complaint says, "China-based gaming companies have been aggressively expanding in the U.S. by investing in U.S. gaming companies (e.g., Tencent's 40% stake in Epic Games, developer of Fortnite) and funding start-up gaming studios, all while enjoying protected access to the largest revenue opportunity in gaming at home in China." That passage calls into question that the FTC is doing the right thing even from a purely political point of view. The following two sentences from Microsoft's filing should also give the FTC pause:
"[A]fter nearly a full year investigating this transaction, receiving millions of Microsoft and Activision documents, and speaking to over a dozen witnesses, there is no evidence that Xbox intends to take Call of Duty away from PlayStation—or any platform at all. No emails, no text messages, no testimony."
