If Microsoft thought it had found a way to placate Washington and insulate itself from the regulatory backlash hitting Big Tech, it has just had a rude awakening.
The Federal Trade Commission’s legal challenge on Thursday to the software company’s $75bn purchase of gaming company Activision Blizzard marks the first direct regulatory threat to the US software giant in more than two decades. With competition authorities in the UK and EU intensifying their own investigations, it has threatened to touch off a spate of actions that could unravel the gaming industry’s biggest deal.
The FTC’s intervention, under the direction of chair Lina Khan, is also one of the first clear signs that the regulators will try to prevent the biggest US tech companies from expanding the reach of their empires through acquisition — even when the deals appear to pass muster under most traditional antitrust analyses.
“This is the most important merger challenge that the Biden administration antitrust agencies have brought so far,” said William Kovacic, former FTC chair. It is set to be the “landmark battle” that will define the administration’s “commitment to bring a tougher approach to merger control and to Big Tech in particular”, he added.
The action threatens a careful attempt by Microsoft to distance itself from past antitrust battles that has been years in the making. Brad Smith, the company’s long-serving top lawyer and president, has become a fixture in Washington and Brussels, as the company has sought to establish a clear contrast between its own business practices and its Big Tech rivals.
In announcing the deal early this year, Microsoft was at pains to position itself as a more “open” rival to what it argued were the restrictive smartphone worlds of Google and Apple, aligning itself with proposed legislation in Washington that would force its rivals to open up their mobile app stores.
It also sought to paint itself as a smaller challenger to gaming giant Sony, maker of what it called the “dominant” PlayStation, and the massive mobile gaming business of Tencent in China.
The depth of Microsoft’s failure has been evident in the hardening international regulatory consensus that has been forming against the Activision deal. The FTC’s arguments bore a close echo of the UK’s Competition and Markets Authority, which recently opened a second-stage investigation.
Top of the regulators’ complaints is the risk that Microsoft could make Activision’s games exclusive to its Xbox, hitting rival console makers. Much of the attention has fallen on Call of Duty, a game which has brought in more than $30bn in revenue in its 19-year life.
Smith wrote in a commentary in the Wall Street Journal earlier this week that it would be “economically irrational” for Microsoft to take Activision’s games away from rival consoles. Besides cutting off a source of revenue, he said, this would prevent the “cross-play” that lets gamers using different hardware join multiplayer games, something that would make Call of Duty less attractive to all gamers.
The FTC has rebuffed arguments such as this before. US chipmaker Nvidia made a similar case when trying to buy SoftBank-owned chip design outfit Arm two years ago, claiming that its economic interest lay in continuing to make Arm’s designs freely available to others. It abandoned the acquisition when regulators on both sides of the Atlantic refused to accept its assurances.
To strengthen its case, Microsoft sweetened the terms of an earlier offer by saying that it would make Call of Duty available for up to 10 years on rival consoles. Nintendo accepted the offer earlier this week, giving Microsoft a lift as its case before the FTC came to a head. But Sony has refused to budge.
In a partially redacted legal complaint issued late on Thursday, the FTC said Microsoft had made, and failed to follow through on, similar assurances before. When buying games company ZeniMax last year, it said, Microsoft told the EU it would not have an incentive to withhold the company’s games from rival consoles, only to reverse course after the deal was completed.
In another echo of the UK regulators’ reservations about the deal, the FTC said it would give Microsoft an unfair advantage in the new market for game subscriptions. This could prove to be a stronger part of the regulators’ case than the arguments about exclusivity, said Joost Rietveld, an associate professor at University College London who specialises in platforms and gaming. “It puts them in a position to be dominant in that segment,” he said.
Like the UK’s CMA, US regulators also said that owning Activision’s games could help Microsoft dominate the nascent market for cloud gaming — giving it the chance to lead a new streaming market in the same way that Netflix did for video. However, cloud gaming is only a tiny part of the industry, weakening this part of the case, according to Rietveld.
The FTC’s expansionist approach will face some serious tests. Its case against Microsoft came on the same day that a US court heard the agency’s request for an injunction against another deal, Meta’s purchase of VR app company Within.
If the court rejects the FTC’s argument in that case, “it would be another indication that the agencies are being overly aggressive in their efforts, much more so than the established antitrust case law”, a senior M&A lawyer said.
But the complaint issued on Thursday could also act as the starting gun for wider international action against the Activision deal. The FTC action “could have the effect of emboldening other authorities” that are probing the deal in London and Brussels, said Kovacic, and neutralise the risk that any action they took against Microsoft would be seen as a “protectionist swipe at American companies”.
The agency’s case is not due to be heard until August. Well before that, at the end of April at the latest, the UK authorities are due to deliver their verdict. For Microsoft’s push to become a much bigger force in the gaming world, the dark clouds are starting to gather.
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