FTC, Microsoft spar in court over Activision deal

The Federal Trade Commission kicked off a five-day hearing over Microsoft’s $69 billion takeover of video game giant Activision Blizzard, urging a federal judge to temporarily pause the deal from closing before a full trial can take place.

If the deal is completed, the combined company “is likely to have the ability to harm competition in various markets related to consoles, subscription services and the cloud," FTC lawyer James Weingarten said in his opening statement. Weingarten said Microsoft has justified the deal internally with the possibility of making popular Activision games like Call of Duty exclusive to its platforms.

Once Microsoft owns this content, they can withhold access to rivals entirely, increase their costs, or degrade the content on their services, Weingarten said. “It’s not just about whether a game will be completely yanked from a rival.”

Microsoft lawyer Beth Wilkinson disputed that characterization, saying Microsoft’s intention is to bring Activision games to a wider audience, as evidenced by pending deals with Nintendo, Nvidia, which operates a cloud gaming platform, and others.

Furthermore, Wilkinson criticized the FTC for relying so heavily on testimony and documents from Sony Interactive Entertainment, the world’s largest video game company, and now the “complainer-in-chief” against the deal. In fact, Sony Interactive Entertainment CEO Jim Ryan originally said he was not concerned about the deal, which is a “great strategy for trying to break the status quo” of Sony’s 20-year dominance in gaming, Wilkinson said.

The sparring is taking place in a courtroom packed with lawyers, journalists and hedge fund staffers with large bets on whether the merger will happen. Presiding over the non-jury hearing is U.S. District Judge Jacqueline Scott Corley, who was appointed to the bench by President Joe Biden.

It is the FTC’s biggest test yet of its ability to police competition in fast-moving technology markets, a key priority for the agency Chair Lina Khan, an antitrust hawk installed by President Joe Biden in 2021.

The companies will bring out a series of high-profile executives, including Microsoft CEO Satay Nadella and Activision chief Bobby Kotick, to make their case in favor of the deal. The fight is also a key barometer of Microsoft’s carefully crafted white knight reputation, which until recently has helped it skirt the aggressive oversight directed at other tech giants such as Google, Meta, Amazon and Apple.

The FTC originally sued the companies in its in-house administrative court in December. That case, overseen by an administrative law judge, is set to go to trial in August. However, only a federal court has the authority to block a merger, and the companies have been pressing the FTC to make its case there. The hearing is meant to pause the deal pending the outcome of the administrative trial.

Until recently, however, at least according to the FTC, the deal was not at risk of closing. The United Kingdom’s Competition and Markets Authority vetoed the deal in April, saying it could harm competition in the nascent cloud gaming market. The following month the European Union approved the deal after the companies promised to not withhold popular Activision titles like Call of Duty from rivals, including Sony.

The U.K. decision set off a chain of fast-moving events. The companies are on a long-shot, fast-track appeal, though that would not be decided until after the current July 18 contractual deadline to close the deal. Yet after the CMA decision, the companies began contemplating whether they could close the deal “around” the U.K., according to a person with knowledge of their thought process, which was first reported by Bloomberg. While it's unclear what exactly that entails, it could involve keeping the U.K. operations of the two companies separate while integrating the rest of their businesses around the world.

When the companies refused to assure the FTC that they would not close before the U.K. proceedings wrapped, the FTC said it had no choice but to seek a temporary injunction to block the acquisition, pending its in-house trial.

In practice, whichever side loses its fight over that injunction in federal court typically gives up, with either the companies abandoning the deal or the FTC dropping its case. Wilkinson said if the companies lose, the deal is dead.

Central to the FTC’s concerns is whether acquiring Activision would give Microsoft an unfair boost in the video game market. Microsoft’s Xbox is No. 3 behind the industry-leading Sony Interactive Entertainment and its PlayStation console. Sony, however, is the deal’s primary opponent, telling the FTC and foreign regulators it would be significantly disadvantaged if Microsoft made hit games like Call of Duty exclusive to its platforms.

Microsoft has pledged to continue making Call of Duty available on competing platforms and has reached multiple 10-year agreements including with Nintendo and Nvidia, which operates a cloud gaming service, to make the game available, contingent on it closing the deal. Microsoft extended the same deal to Sony, which has so far not been accepted.

Jim Ryan, CEO of Sony Interactive Entertainment, is not testifying live during the hearing, though video of his deposition in the case will be played in court. Sony has said it fears losing access to Call of Duty and other popular games.

Wilkinson's opening statement included an email from Ryan that downplayed the deal shortly after it was announced in January 2022.

“It’s not an exclusive play at all,” Ryan said in the email. They are thinking bigger than that and they have the cash to make moves like this. I’ve spent a fair amount of time with both [Microsoft gaming head Phil Spencer] and Bobby [Kotick] over the past day. I’m pretty sure we will continue to see [Call of Duty] on [PlayStation] for many years to come,” he said. “I’m not complacent and I’d rather this hasn't happened but we’ll be ok, more than ok.”

A Sony spokesperson did not respond to a request for comment.

Microsoft has repeatedly said that pulling Call of Duty from Sony’s PlayStation console would not make financial sense. The FTC’s concerns, however, extend beyond physical consoles and include whether Microsoft would leverage the deal to dominate the nascent cloud gaming market and subscription gaming services. The company’s Xbox Game Pass is already the market-leading subscription service.

The allegations that Microsoft is using the deal to gain an unfair advantage in the nascent cloud gaming market make it a difficult case for the FTC, said Vanderbilt Law School professor Rebecca Haw Allensworth, who focuses on antitrust law and favors aggressive enforcement.

The FTC lost a similar challenge to Meta’s purchase of a virtual reality app-maker, after arguing that deal threatened competition in the early-stage virtual reality market.

“It’s likely that the government will lose, even if we factor in the fact that in the last five years, Congress, the antitrust agencies and to some extent courts, have been willing to get on board with the fact that tech consolidation has gone too far.” Still, she said, it’s important to bring these cases in order to develop the law.

While most regulators around the world have sided with the companies, New Zealand’s antitrust regulator this week said it isconcerned the deal will harm competition.