Microsoft, Activision defeat FTC’s bid to block $69B deal

Microsoft’s fortunes in its hotly contested takeover of video game company Activision Blizzard dramatically improved Tuesday after a federal judge sided with the companies over the Federal Trade Commission’s attempt to block the deal, and after a U.K. antitrust regulator signaled its receptiveness to reversing its own decision against the merger.

Tuesday’s ruling from U.S. District Judge Jacqueline Scott Corley is a stinging rebuke for the FTC in the biggest test yet of its ability to police competition in fast-moving technology markets, a key priority for agency Chair Lina Khan, an antitrust hawk appointed by President Joe Biden in 2021. The FTC initially challenged the deal in its in-house court in December.

The companies are not yet fully in the clear, with the U.K.’s Competition and Markets Authority blocking the deal in April, saying it would harm competition in the burgeoning cloud gaming market. Microsoft makes the Xbox gaming console, which competes with Sony’s Playstation and the Nintendo Switch. Activision makes games, including the blockbuster hit Call of Duty.

However, after Tuesday’s ruling, the CMA issued a statement saying the companies’ appeal of that ruling was put on hold while they continue settlement negotiations. “We stand ready to consider any proposals from Microsoft to restructure the transaction in a way that would address the concerns set out in our Final Report,” the CMA said. An appeal hearing had been scheduled for late July.

The ruling follows a five-day hearingbefore Corley in late June, in which the FTC sought to temporarily delay the deal pending a full trial in its administrative court, currently scheduled for August.

“The FTC has not shown it is likely to succeed on its assertion the combined firm will probably pull Call of Duty from Sony PlayStation, or that its ownership of Activision content will substantially lessen competition in the video game library subscription and cloud gaming markets,” Corley wrote in the 53-page, heavily redacted ruling.

Corley telegraphed her decision during the hearing. “In substance, you won and you got what you wanted and you forced them to go out and enter into these agreements,” Corley told FTC attorneys in court. She was referring to the settlements Microsoft entered into with a number of video game companies, including Nintendo and Nvidia, in which it promised equal access to Call of Duty.

Microsoft’s chief video game rival and primary opponent of the deal, Sony, has so far refused to take that deal, saying it is concerned Microsoft will either restrict or degrade access to that game and others both on consoles and in the emerging sector of cloud gaming.

“And maybe it also helped that they at least seemed to be less bullish on cloud,” after the FTC’s lawsuit, Corley said in court, referring to Microsoft executive testimony during the hearing. “[B]ut they went out and they signed these agreements now with Nvidia to give them Activision’s content. How is that not good for consumers?”

“We are grateful today for this quick and thorough decision and hope other jurisdictions will continue working toward a timely resolution,” said Microsoft President Brad Smith. “As we have demonstrated consistently throughout this process, we are committed to working creatively and collaboratively to address regulatory concerns.”

Activision CEO Bobby Kotick on Tuesday said “Our merger will benefit consumers and workers. It will enable competition rather than allow entrenched market leaders to continue to dominate our rapidly growing industry.”

The FTC is “disappointed in this outcome given the clear threat this merger poses to open competition in cloud gaming, subscription services, and consoles,” said agency spokesperson Douglas Farrar. “In the coming days, we’ll be announcing our next step to continue our fight to preserve competition and protect consumers.”

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. The agency said Sony and other video game companies would be significantly disadvantaged if Microsoft made hit games like Call of Duty exclusive to its platforms.

In her ruling though, Corley said the evidence did not support that assertion. “To the contrary, the record evidence points to more consumer access to Call of Duty and other Activision content.”

The FTC can appeal to the U.S. Court of Appeals for the Ninth Circuit. The FTC can also continue with its in-house administrative case, though the agency typically abandons merger challenges after losing a preliminary injunction in federal court. And even if it were to ultimately succeed in its in-house court, only a federal court can block a deal. That means that if the companies reach an agreement with the CMA and close their deal, the FTC would be stuck trying to unwind the merger several years down the road, a much more difficult proposition. The companies currently have a July 18 contractual deadline to close their deal.

While the CMA and the companies are reengaged in settlement talks, it remains unclear what offer will appease the UK regulator. The CMA previously said Microsoft’s deals with rivals — which were accepted by the European Commission when it cleared the deal — are not enough, and it would likely need to sell the Call of Duty game franchise. Microsoft previously said that was a nonstarter. In a statement Tuesday, Smith said Microsoft is considering “how the transaction might be modified” to address the CMA’s concerns. The companies will almost certainly have to extend their self-imposed deadline to accommodate the CMA.

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. If an agreement isn’t reached with the CMA, that could still be an option.

“In the end, Corley was convinced by the agreements Microsoft had with Nintendo and the cloud gaming platforms. With all of that, its going to be difficult to prove consumer harm,” said Florian Ederer, an economics and management professor at Boston University. Ederer, who is a proponent of aggressive antitrust enforcement and was initially opposed to the deal prior to the companies’ concessions, said it will be difficult for the FTC to appeal. “This is not a bad opinion, it’s very well done. It lends some credence to the FTC’s concerns but in balance comes out in favor of Microsoft. So it’s hard to see how a different judge would rule differently.”

The FTC has until the end of Friday to obtain a hold on the ruling from the Ninth Circuit. Before the hearing, Corley blocked the companies from closing pending the release of her ruling.

The American Economic Liberties Project, a progressive advocate of aggressive antitrust enforcement, urged the FTC to appeal. “When Microsoft’s own emails say they are building a ‘moat’ and trying to ‘spend’ their competitors ‘out of business,’ that should be enough for the court to hit pause,” said Lee Hepner the group’s legal director. “The fact that Judge Corley’s son works for Microsoft taints the outcome at a time when judicial ethics are top of mind for many.”

But the Communications Workers of America, which supports the deal, applauded the ruling. “As it relates to the impact on workers, the actions Microsoft have taken will not only prevent harm, they represent a true shift in the power workers will have in the video game industry.”

One potential avenue for the FTC’s appeal is Corley’s interpretation of the Clayton Act, the U.S. antitrust law barring anticompetitive mergers, said Bob Lande, a law professor at the University of Baltimore. According to the statute, deals are illegal when “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”

That is different than Corley’s interpretation of the statute, Lande said. Corley wrote in her ruling, “It is not enough that a merger might lessen competition—the FTC must show the merger will probably substantially lessen competition,” which could be interpreted as a higher bar than the statute allows for.

“Textualism is increasingly used by judges, who pay really close attention to the precise words of the statute,” Lande said.