The Federal Trade Commission (FTC) just held a closed-door meeting from 11 AM to 1 PM Eastern time, and has now announced that the Commission voted to file a complaint against Microsoft's $69B acquisition of Activision Blizzard (NASDAQ:ATVI). The FTC website lists the related adjudicative proceeding before an Administrative Law Judge (ALJ)--i.e., this proceeding will take place within the same agency--under matter/file number 2210077, In the Matter of Microsoft Corporation, a corporation, and Activision Blizzard, Inc., a corporation. Those proceedings typically take more than six months, and statistically the FTC wins almost all of the time, but in this case that is not certain.
I predict that this course of action, which is attributable to a political desire to make a "adventurous" anti-Big Tech move irrespectively of the merits of the case, is merely going to delay the consummation of the transaction, but given the absence of any such thing as a credible theory of harm, it will ultimately happen. Even if the ALJ approved the agency's decision, the FTC would lose in the D.C. Circuit.
For the avoidance of doubt, this lawsuit does not mean that the FTC is taking action against any wrongdoing that has occurred. Microsoft and Activision Blizzard are within their rights to seek approval of the transaction. In some other jurisdictions such as the EU, regulatory authorities make decisions that can then be appealed. In the U.S., the FTC and the Antitrust Division of the Department of Justice (DOJ) can only elect to sue, but it is then up to the judges to hand down a ruling.
As I write this, Activision Blizzard's stock price is down by more than 2%, trading only slightly above $74 while Microsoft's offer is $95 per share. Wall Street analysts largely expected this to happen, but that expectation, too, is based on political rather than legal considerations.
A few days ago, not only Microsoft but also the Communications Workers of America (CWA) labor union made the case against the case against this deal. Temporarily there was hope that one of the three Democrats could side with Republican commissioner Christine Wilson, in which case the FTC could not have brought litigation and the deal would have been cleared. And the fact that Nintendo signed a 10-year agreement with Microsoft concerning Activision's Call of Duty (subject to the consummation of the transaction, of course) would have given the FTC another good reason--if any was needed--to approve the acquisition.
Now it's clear that the FTC is suing for the sake of suing. Here are a few observations on the FTC's press release:
The first paragraph emphasizes numerical, not legal, issues: "technology giant", "leading video game developer", "blockbuster gaming franchises", "$69 billion deal", "Microsoft's largest [deal] ever and the largest ever in the video gaming industry"--none of that has to do with whether there will be a substantial lessening of competition, which is the legal standard to meet. A relatively small deal can have that effect while a large deal may be neutral or even procompetitive. Size alone is not a substitute for a theory of harm.
The FTC then expresses its concerns that the acquisition "would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business." The Xbox is the #3 gaming console. Sony is the undisputed leader, and would be even if all Call of Duty (CoD) players switched from PlayStation to Xbox. And Microsoft offered Sony a 10-year deal that Sony just didn't want because it knows it doesn't need it: it would make no economic sense for Microsoft to remove CoD from the PlayStation.
The second paragraph says that the FTC's complaint "point[s] to Microsoft’s record of acquiring and using valuable gaming content to suppress competition from rival consoles." However, what Microsoft did with Minecraft, arguably the most interesting game it ever acquired, tells a different story. The FTC then mentions Microsoft's acquisition of ZeniMax, the parent company of game development studio Bethesda Softworks: "Microsoft decided to make several of Bethesda's titles including Starfield and Redfall Microsoft exclusives despite assurances it had given to European antitrust authorities that it had no incentive to withhold games from rival consoles." Actually, Microsoft did not make any Bethesda title that existed when the deal was closed (March 9, 2021) an Xbox exclusive as a table I published in a recent post shows. The FTC mentions Starfield, which according to Wikipedia "is scheduled to be released in the first half of 2023," as is Redfall.
Microsoft published a document (PDF) that shows Microsoft never made promises with respect to future titles, but made--and kept--promises relating to titles that existed when the deal was done. In fact, Microsoft explicitly told the European Commission that decisions on future titles would be another story.
What I as an app developer who brought his own complaints over Apple's and Google's app distribution monopolies find most disappointing is that the FTC does not seem to recognize the procompetitive benefits of the transaction with a view to mobile app distribution. While the DOJ focuses on Apple's and Google's app store practices, clearance of this acquisition would have been an opportunity for the FTC to make its contribution to the demonopolization of mobile app distribution.
I will read the complaint when it becomes available, but based on everything that is known, which now also includes the FTC's press release, this is just not the kind of deal that merger rules are meant to prevent.
Three jurisdictions have granted unconditional clearance: Saudi Arabia, Brazil (a well-considered and elaborate decision), and Serbia. And the FTC would have had the opportunity to approve the deal on the basis of firm and enforceable commitments. It is a terrible attitude for a competition authority not to try to solve whatever problems it believes to have identified through behavioral remedies. It is not constructive, and it rewards Sony for not being constructive either.
On each page of the FTC's website, the agency's logo appears in the top left corner, with the mission statement of "PROTECTING AMERICA'S CONSUMERS"--not "PROTECTING SONY"...
In summary, the FTC is now litigating against a merger
with rhetoric that emphasizes size (which is irrelevant when the industry in question is fragmented),
without a legally defensible theory of harm,
with a central allegation (concerning ZeniMax/Bethesda's titles) that does not withstand scrutiny as Microsoft can show--just based on official documents--that it has consistently delivered on what it had promised,
without regard to the procompetitive benefits that app developers like me are interested in (and that would also be in the interest of America's consumers), and
with the worst complainants imaginable short of Apple (which is not known to have opposed the deal): Sony and Google, two companies who seek to protect their walled gardens in which they want to squeeze developers and milk locked-in consumers.
Those are the ingredients of a case that will presumably fail to convince judges. It is now up to the ALJ to demonstrate independence and rule against the FTC. Alternatively, the FTC could recognize its error and settle before any further harm is done, but I don't know after today's decision how much hope there is for that. Maybe the FTC wants to make a statement and hopes that after losing this case it will be in a better position to push (alongside the DOJ) for new merger laws. I've seen speculation about that potential motivation on social media.
