The Federal Trade Commission’s effort in federal district court to pause Microsoft’s purchase of video game maker Activision Blizzard reveals an uphill fight for the regulator. The government’s case doesn’t meet the usual legal requirements for blocking a merger. Rather, it’s an effort by the regulatory agency to assert itself more boldly — what critics call a power grab.
The proposed $69 billion deal, announced in January 2022, would give the world’s fourth-largest tech company a foothold in the world of mobile gaming. Activision Blizzard’s catalog includes popular titles such as Call of Duty, World of Warcraft, and Candy Crush. Microsoft is among the top three makers of gaming consoles globally, behind Sony and ahead of Nintendo. Microsoft would also utilize the game library to promote its subscription gaming pass and cloud gaming services in the future.
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If closed, the deal would mark the biggest sum a U.S. tech company has ever paid for an acquisition. The implications have attracted attention from regulators around the world. Competition authorities from the United Kingdom have acted to block the deal, while the European Union reversed its initial objections and cleared the purchase.
But the FTC, led by Chairwoman Lina Khan, an appointee of President Joe Biden, fears anticompetitive effects from Microsoft’s purchase of Activision Blizzard. So it asked a federal court temporarily to stop the deal from closing before conducting a full trial in the agency’s in-house administrative court. If the federal court grants the injunction, the merger will be unable to close on the planned date of July 18 — perhaps causing Microsoft to abandon the deal altogether.
But many observers of the proceeding doubt that will happen.
Patrick Hedger, executive director of Taxpayers Protection Alliance, told the Washington Examiner, “The FTC is grasping at straws to hide the fact that this is just another case based on nothing but ‘big is bad.’”
Leadership at the agency has moved away from the decadeslong rule of consumer welfare to emphasize protecting small businesses, labor interests, and other goals instead. The liberal agenda reflects the agency’s leadership. The FTC has only three sitting commissioners in place on the five-member panel, and all are Democrats. The two appointed Republican commissioners resigned amid accusations of partisanship at the agency.
In court, the FTC made known its concern that once Microsoft owns Activision Blizzard-created games, it won’t offer them to competing consoles or will otherwise degrade the product as compared to its own console experience. In response, Microsoft pledged to offer Call of Duty, one of the most popular video games of all time, to other companies for 10 years. Nintendo signed the legally binding agreement, but Sony demurred and has continued to lobby against the acquisition. The federal hearing concluded with closing arguments on June 29, in the courtroom of U.S. District Judge Jacqueline Scott Corley in the Northern District of California.
There’s more at stake than whether Microsoft’s desired video console acquisition deal goes through, wrote Matt Stoller, a fellow at the Open Markets Institute.
“This case isn’t just about Sony and console markets, it’s about the future, and in particular what video gaming will look like in a few years, when the technology for gaming is radically different,” Stoller wrote.
During the hearing, Stoller noted, the FTC struggled to show concretely how gamers would be hurt on subscription or cloud gaming, which allows users to stream games rather than download them if the deal were to go through.
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The case is unusual more broadly because it is a vertical merger, where a company buys another company to be folded into its supply chain of products or services. A vertical merger hasn’t been blocked in the United States for decades because such moves are understood to provide benefits in efficiency, price, or performance to consumers. It’s more common that horizontal mergers, where a company is purchasing a direct competitor, are challenged when the new combined market share reaches a certain percentage.
Stoller takes a longer-term view of what the outcome of the case might be, concluding that even if “the FTC loses, it won’t stop the momentum for addressing corporate power.”
