On December 8, 2022, the same day that the Federal Trade Commission (FTC) delivered its opening arguments to a federal judge in California in the FTC’s bid to halt Meta’s acquisition of virtual reality gaming company Within, the FTC also launched an administrative proceeding seeking to block Microsoft’s proposed $69 billion acquisition of video game publisher Activision Blizzard. With these moves, FTC Chair Lina Khan continues to advance her agenda to take on Big Tech and demonstrates that antitrust enforcers are not hesitant to take aggressive stances, even in areas where they have previously had a limited record of success.
Microsoft develops and publishes a number of its own popular video games but is also a leading purveyor of video gaming platforms and consoles, including Xbox. The FTC’s complaint focuses only on the vertical aspect of the transaction. Specifically, it alleges that if the gaming deal were allowed to close, it would lead to Microsoft disadvantaging Sony, Nintendo and its other platform and console rivals by degrading or otherwise foreclosing their access to Activision’s blockbuster games, including those from the “Call of Duty” and “Diablo” franchises.
By choosing not to focus on the horizontal competition between Microsoft and Activision in the development and publishing of popular games, and instead focusing on a downstream market in which Activision does not compete, Khan’s FTC continues a recent string of actions against so-called vertical mergers.
The first such action was taken soon after Khan’s appointment as FTC Chair in the summer of 2021, when the Commission withdrew its approval from the joint FTC/Department of Justice (DOJ) Vertical Merger Guidelines. According to Khan and other Democrats on the Commission, these guidelines encouraged too much deference to inherently weak arguments often used to justify nonenforcement decisions in vertical cases. Among such arguments are that the efficiencies associated with vertical integration tend to benefit consumers through lower prices or increased innovation.
In the months that followed the FTC’s withdrawal from the guidelines, Khan and her staff pursued a more aggressive approach toward vertical deals, litigating two challenges (Illumina/Grail and Lockheed/Aerojet) with mixed results. An administrative law judge rejected the FTC’s bid to block the Illumina deal in September 2022, a ruling which the FTC staff is appealing to the full Commission. The parties to the Lockheed deal ultimately abandoned the deal weeks after the FTC launched an administrative action to block it. A third vertical transaction, a proposed tie-up between chipmaker Nvidia and chip designer Arm, was eventually abandoned by the parties two months after the FTC filed an administrative complaint.
As the agency heightens its focus on vertical mergers, it confronts some difficult precedent, most notably in the DOJ’s attempt to block AT&T’s acquisition of Time Warner in 2018. The arguments made by DOJ in that case—the first litigated challenge to a vertical transaction in 40 years—bear a notable similarity to the FTC’s current allegations against Microsoft. In the AT&T matter, the government alleged that by completing the deal, AT&T would gain the incentive and ability to raise the cost of, or even deny access to, key Time Warner television content to the detriment of competitors of AT&T’s DirectTV service. The government further argued that such a foreclosure strategy would ultimately be more profitable for AT&T than simply pursuing the widest distribution possible for valuable Time Warner programming. The court was unpersuaded by the government’s arguments. The DOJ, and the broader effort to step up vertical merger enforcement, suffered what is regarded as a resounding defeat.
The FTC may also run into a set of facts in the Microsoft matter that could complicate their efforts. While traditional antitrust enforcement might legitimately be concerned that a dominant gaming console or platform firm acquiring a prominent game studio and/or entering exclusive distribution deals with such could threaten to exclude smaller rivals (ultimately seeing them exit the market), the FTC’s complaint against Microsoft does not allege that Microsoft even is the largest participant in any of the relevant markets that the FTC has alleged would be harmed by the proposed transaction. Further, the FTC’s complaint makes no mention of the fact that Sony and Microsoft, as well as Nintendo, each has competed for years by developing vertically integrated game content for their consoles, acquired previously independent game studios, and made certain acquired game titles exclusive for the purpose of attracting users to their respective console platforms.
The FTC’s complaint to stop the Microsoft deal comes after Microsoft apparently made several attempts to assuage enforcers’ concerns and avoid litigation.
In February, soon after the deal was announced, Microsoft executives publicly committed to relaxing restrictions on developer access to Microsoft app stores and not promoting its own games over those of competitors. Later in the year, it was reported that Microsoft was prepared to make a deal with the FTC via a consent decree that would govern the access to Activision’s content that it would provide to console and platform rivals. Microsoft itself even announced a 10-year deal with Nintendo to release future “Call of Duty” games on the Nintendo Switch console and made a similar offer to Sony for its PlayStation console.
Khan has previously expressed skepticism of similar remedies, arguing that commitments like this are difficult to monitor and enforce, and tend to fail to address actual harms to competition. Khan’s supporters have recently cited the DOJ’s settlement of the merger between Ticketmaster and Live Nation in 2010 as an example of how ineffective the government’s creative remedies have been in preserving vibrant competition—in that case, in the live entertainment and ticketing industry. In the absence of available structural remedies (e.g., divestitures of business lines) that would be clear and decisive in restoring competition, Khan’s stated preference toward negotiated settlements is to simply block the entire transaction.
According to multiple reports, the availability of a potential settlement on Microsoft/Activision may have at one point split the Commission’s Democratic majority on the question of whether to launch a challenge or accept a consent decree. Such speculation was soon put to rest when the FTC issued its complaint—just two days after Microsoft announced its tentative “Call of Duty” deal with Nintendo.
Susan Lee contributed to this alert.