Microsoft wins quick antitrust battle
What will the FTC do now?
Microsoft’s $69 billion deal to acquire Activision Blizzard is still on, after a San Francisco judge ruled in its favor Tuesday morning.
Judge Jacqueline Scott Corley wrote in a 53-paged opinion that the U.S. Federal Trade Commission had not proven that Microsoft would pull Call of Duty from PlayStation or that owning Activision would hurt competition in gaming subscription or cloud gaming markets.
Corley wrote, “Microsoft’s acquisition of Activision has been described as the largest in tech history. It deserves scrutiny. That scrutiny has paid off: Microsoft has committed in writing, in public, and in court to keep Call of Duty on PlayStation for ten years on parity with Xbox.”
The deal was first announced in January 2022. Microsoft wants to buy Activision Blizzard for its mobile gaming dominance (Candy Crush, Call of Duty) and its portfolio of popular games (COD, World of Warcraft, Diablo). Activision CEO Kotick negotiated the deal after months of headlines about the company’s sexual harassment lawsuits. If the deal is completed, Kotick stands to earn about $400 million.
The FTC argued that the deal would hurt Sony’s business and affect consumers, and pointed to the success and dominance of Call of Duty as an example.
The temporary restraining order will dissolve on Friday unless the FTC is able to appeal. FTC spokesperson Douglas Farrar said in a statement: “In the coming days we'll be announcing our next step to continue our fight to preserve competition and protect consumers.”
The decision did not surprise the many analysts interviewed by Updater. The FTC has been taking an aggressive stance against tech giants and was not expected to win.
Those who were in opposition to the deal called for an appeal of the decision. Some noted that the judge had a son employed with Microsoft, which could be a potential conflict of interest.
Below, we’ll dive into the specifics of how the judge made her decision, and a special look back at Microsoft’s 1998 antitrust case. This newsletter is paywalled but will unlock in two days for free subscribers, so please subscribe and stay tuned to read more.
Judge Corley found that the FTC did not prove that the merger would “substantially” hurt market competition. She found that the FTC did not prove that Xbox would have an incentive to remove Call of Duty from its competitor, quoting PlayStation CEO Jim Ryan saying, “I’m pretty sure we will continue to see COD on PS for many years to come.”
Microsoft and Activision produced nearly three million documents, according to the judge’s statement. Corley said that of these, “there are no internal documents, emails, or chats contradicting Microsoft’s stated intent not to make Call of Duty exclusive to Xbox consoles.”
Corley ventured into making predictions about the console industry. She wrote, “Why would Microsoft risk that brand reputational harm? Especially since the video game console market is shrinking — not growing; it is not the future of video gaming.”
She also voiced an opinion that seems to echo Microsoft’s: “After the merger, consumers can utilize the cloud to play on the device of choice, including, it is intended, on the Nintendo Switch. Perhaps bad for Sony. But good for Call of Duty gamers and future gamers.”
The judge found that the Nintendo Switch isn’t part of the relevant market, which is a point in the FTC’s favor, as it wished to prove that the market is PlayStation and Xbox.
The FTC argued that looking at Microsoft’s acquisition of ZeniMax and how Starfield and Redfall were made exclusive was more evidence of how Call of Duty would be made exclusive. But the judge wrote that “neither Starfield nor Redfall are remotely similar to Call of Duty.”
Does it make financial sense to take COD off PlayStation? This portion of the document was unfortunately redacted.
The judge found that the FTC’s argument that Xbox could hurt Sony’s business by releasing Call of Duty later on PlayStation than Xbox or having a Christmas character exclusive to the Xbox version was not persuasive. She found no evidence that Microsoft would behave this way.
Why all the focus on COD and not other games? The judge said it’s because “the FTC’s evidence focused on this one game.” She added that the commission did not offer evidence on games like Diablo and whether they would hurt console market competition if made exclusive to Xbox
The judge pointed to a lack of evidence for how Call of Duty on Xbox Game Pass would affect competitors including Amazon, Electronic Arts, Ubisoft and Sony.
She believes Activision CEO Bobby Kotick’s testimony that having games like Call of Duty on Xbox Game Pass is not financially wise. So for the gaming subscription market, the judge found the merger may not substantially hurt competition.
Lee Hepner, legal counsel at the anti-monopoly group American Economic Liberties Project, said, “The court blindly defers to Kotick’s assertion that it wouldn’t make financial sense. What Corley ignores altogether, and this is throughout the opinion, is Microsoft’s ability to do things that don’t make near-term financial sense for the sake of advancing its long-term monopoly ambitions.”
As for cloud gaming, the judge pointed to Microsoft’s agreements to bring Activision games to competitors such as Nvidia’s GeForce Now should the merger close. She wrote that a Microsoft-Activision company “will probably not” have an incentive to breach these agreements and make Activision content exclusive to xCloud.
For these reasons outlined above, the judge dismissed the case and denied the FTC a preliminary injunction. She added that the opinion was rushed as the deal terminates on July 18, so that’s why some of the FTC’s arguments are left unaddressed.
Keep your eyes peeled: A less redacted version of the opinion may be filed by July 18.
Reactions
Microsoft, Activision Blizzard, the labor union Communications Workers of America, and venture capital firms released statements about how this decision benefitted them.
Kotick called Sony and Nintendo “entrenched market leaders” that dominate the gaming industry, in a statement. He said, “Our merger will benefit consumers and workers.”
Microsoft vice chair and president Brad Smith thanked the court for a “quick and thorough decision” and said that he hoped other jurisdictions would follow.
The U.K.’s antitrust regulator, the Competition and Markets Authority, said that it’s agreed to pause its legal battle and discuss a remedy. “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,” it stated. The U.K. Tribunal needs to approve the pause.
A look back at history
Microsoft’s last major antitrust battle was in 1998 when a federal judge ordered it to break up for tying its internet browser and operating system products together and violating the Sherman Antitrust Act. Microsoft submitted video evidence containing errors.
The presiding judge, Thomas Penfield Jackson,1 was found to have violated the code of conduct when he gave interviews to news media during the trial. He later had to recuse himself from a different case where Black employees sued Microsoft for racial discrimination.
Jackson responded by saying that his bias was formed by listening to Microsoft during the antitrust trial. Microsoft executives had “proved, time and time again, to be inaccurate, misleading, evasive, and transparently false,” he said. He added that during the case he had formed an impression of Microsoft as a a company “with an institutional disdain for both the truth and for rules of law.”
The decision was overturned on appeal. Microsoft stayed intact instead of splitting into two companies. It agreed to share its application programming interfaces (APIs) with other companies so that they could create software for PCs.
SEGA workers unionize
SEGA workers won their union election on Monday, voting 91 to 26. Each party has five days to submit objections, otherwise the results will be certified and management is required to start bargaining in good faith.
The group has more than 200 workers, based in California, which makes it the largest union in North America so far
I spoke briefly to one of the workers, Emma Geiger, who is a temporary localization editor. They said, “There were many happy tears shed at the final vote count.” They described the team as taking a “well-deserved breather” with some plans to eat food together before they have to start bargaining
SEGA did not immediately respond to comment. In an April letter, president and COO of SEGA of America Ian Curran wrote to employees, “Union matters are new to me and SOA and we are investigating and considering the options available to the company… No SOA employee will be treated any differently whether they support or do not support unionization.”
Additional reading
In the previous issue of Updater, I’ve outlined why Microsoft was likely to win its defense against the FTC.
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Unfortunately, Jackson died in 2013, or I would’ve tried to interview him on his thoughts on this current trial.