On July 10, 2023, the United States District Court for the Northern District of California denied the Federal Trade Commission’s (FTC’s) request to grant a preliminary injunction of Microsoft’s proposed acquisition of Activision Blizzard, clearing a major obstacle on the path to closing. The FTC has filed a notice of appeal with the Ninth Circuit. Significantly, the UK’s antitrust regulator, the Competition and Markets Authority (CMA), announced shortly after the denial that it had agreed toa stay of Microsoft’s appeal against the CMA’s prohibition decision.
This is the FTC’s second loss in a video game merger trial this year, following its failed attempt to block Meta’s purchase of VR fitness studio Within.1 Whereas the FTC publicly touted the Meta/Within loss as a victory in terms of validating the underlying potential competition theory, the Microsoft/Activision loss leaves no room for such positive spin. The opinion creates or exacerbates the following challenges for the antitrust agencies when seeking to enjoin mergers, particularly vertical mergers:
Fix-It-First Remedy “Forecloses” FTC Theory: The court found it compelling that Microsoft proactively made commitments to its gaming platform competitors about access to Activision’s most popular franchise, Call of Duty. Microsoft publicly committed to maintain Call of Duty’s availability on Sony’s PlayStation console and Valve’s Steam store. Although neither Sony nor Valve was willing to enter an agreement with Microsoft, neither doubted Microsoft’s sincerity. Further, Microsoft entered agreements with Nintendo and five cloud gaming providers to bring Call of Duty to these platforms for the first time. The FTC argued the court should consider the effect of these offers and agreements only at the remedy stage, but the court held they were relevant in determining liability: “The FTC must address the circumstances surrounding the merger as they actually exist.” The court found the offers and agreements to be strong evidence against the possibility of harm. Indeed, with respect to the cloud gaming market, the court found the agreements “foreclosed” any argument that the deal would substantially lessen competition.
FTC Attempt to Alter Vertical Merger Standard Unsuccessful: The FTC argued that a vertical merger may be prohibited by showing either an incentive to foreclose, or an ability to foreclose, or “functional liability factors” (such as a “trend toward concentration in the industry”), relying on its own opinion in Illumina/Grail.2 However, the court held FTC had the burden to show Microsoft would have both an ability and incentive to foreclose competitors: “Illumina … provides no authority for this proposition, nor could it…. If there is no incentive to foreclose, then there is no probability of foreclosure and the alleged concomitant anticompetitive effect. Likewise, if there is no ability, then a party’s incentive to foreclose is irrelevant.”
Effect on Competition Must Be Substantial to Block Merger: The court held it was not sufficient for the FTC to show Microsoft would “derive some economic benefit from withholding [content].” In any vertical merger, the court explained, the buyer will have complex incentives, including some incentives to foreclose. Nevertheless, many vertical mergers have “indisputable pro-competitive effects.” The FTC had to show a reasonable probability that the merger would substantially lessen competition as required by Section 7 of Clayton Act.
No Harm in Console Market: The court found no evidence the merger would give Microsoft an incentive and ability to harm competition by removing Call of Duty from PlayStation. Microsoft convincingly argued it would incur huge reputational costs by pulling a long-running, massively popular, cross-platform game away from PlayStation, especially after making public commitments not to do so. The court pointed to Microsoft’s 2014 acquisition of the Minecraft franchise as precedent—nearly 10 years later, Minecraft games are available on a variety of platforms, including PlayStation and Sony’s subscription service, PlayStation Plus. The FTC argued Microsoft has a history of making titles exclusive after an acquisition, pointing to Microsoft’s decision following its purchase of ZeniMax in 2021 to make two new ZeniMax titles exclusive (Starfield and Redfall). But the court distinguished these new titles from Call of Duty, which has a well-established cross-platform community that is key to its continued popularity (notably the court did not discuss any other Activision title in this analysis).
No Harm in Game Subscriptions or Cloud Gaming: The FTC’s economist did not produce any quantitative analysis of game subscription or cloud gaming markets, making it difficult for the FTC to claim there would be harm in these markets. Instead of data, the FTC relied on its assertion that post-merger, Microsoft would include Call of Duty in its Game Pass subscription and cloud gaming offerings, but not offer Call of Duty to rival subscription and cloud gaming offerings. The court agreed with respect to subscription gaming services, but found no competitive harm. Although Microsoft is unlikely to license Call of Duty to rival subscription gaming services such as PlayStation Plus, evidence showed Activision had no incentive to license Call of Duty to subscription services absent the merger. Regarding cloud gaming, Microsoft had in fact reached agreements to bring Call of Duty to five cloud gaming services that would not have been able to access this IP absent the merger.
Combination Benefits Gamers: The court found the merger will benefit gamers by expanding access to Call of Duty. First, by adding Call of Duty to Game Pass, which would not have happened absent the merger. The court credited the expert opinion of Dr. Dennis Carlton that adding Call of Duty to Game Pass “will actually lower costs for many game consumers and harm none.” Second, after announcing the merger, Microsoft reached agreements to bring Call of Duty to the Nintendo Switch and five cloud streaming services, which Activision was unlikely to do as a standalone company.
Judge Corley’s opinion continues a trend of judicial skepticism towards vertical merger challenges and may further impede attempts by the antitrust agencies to litigate such cases. For this reason, it is not surprising the FTC intends to appeal to the Ninth Circuit.
And across the Atlantic, the opinion appears to have been the final push towards an unprecedented climb-down by the CMA. As outlined in our previous alert,3 a CMA merger block has never been fully overturned. However, the current appeal is playing out amidst intense political debate in the UK and calls for oversight powers over the CMA, given allegations that the agency’s repeated killing of global deals means the UK is “closed for business” and discourages UK investment (per Microsoft President, Brad Smith). Facing this political backlash, a rocky start to the UK appeal (with the Tribunal denying the CMA’s request for more time to prepare), and now the FTC’s clear loss in the U.S., the CMA appears to be trying to find a way to settle. This leaves the CMA in uncharted territory, as it already issued its final decision blocking the deal. There are suggestions that the CMA could, based on suitably revised remedies, withdraw and reissue its final decision or carry out a voluntary remittal, where it would essentially carry out another (truncated) review by reissuing its charge-sheet against the deal (Provisional Findings) and enable the standard remedies review and decision process. The CMA could also review a “new” notification of a restructured deal, but it is unclear how quickly even an expedited review (based on a carve-out of the UK business or upfront provision of revised remedies) could be done. This seems to be the most likely outcome, however, as the CMA has publicly poured cold water on the negotiation of remedies after its final decision and pointed to refiling as a potential option.
The next steps by both the U.S. FTC and UK CMA will be closely watched. These developments could mean more favorable winds for global dealmaking and see some reasonable checks placed upon two of the more aggressive global antitrust enforcers. In Europe, the European Commission cleared the deal based on the licensing remedy rejected by the CMA—the developments could also see the CMA reconsider its current skepticism towards behavioral remedies and move more in line with its EU counterpart.
[1] Wilson Sonsini Alert, “So Much Potential (Competition), So Little ‘Available Feasible Means’: FTC Denied Preliminary Injunction of Meta’s Acquisition of Within” (Feb. 24, 2023).
[2] In the Matter of Illumina, Inc. and GRAIL, Inc., Fed. Trade Commission (Apr. 3, 2023).
[3] Wilson Sonsini Alert, “UK Regulator Says Game Over to Microsoft/Activision Deal,” (May 2, 2023), https://www.wsgr.com/en/insights/uk-regulator-says-game-over-to-microsoftactivision-deal.html.
