This Time, Common Sense Prevailed (Premium)

U.S. District Court Judge Jacqueline Scott Corley handed Microsoft a stunning legal victory yesterday. She got almost everything exactly right.

As I’m sure you know, Microsoft announced that it intended to acquire Activision Blizzard in January 2022 for an astonishing $68 billion. If consummated, this deal is its biggest-ever acquisition, far outstripping LinkedIn (2016, $26.2 billion), Nuance (2021, $19.7 billion), Skype (2011, $8.5 billion), ZeniMax Media/Bethesda (2021, $8.1 billion), and GitHub (2018, $7.5 billion). (Because I know so many were fans, Nokia barely rates at “just” $7.2 billion.)

At the time, Microsoft noted that it didn’t expect to close the transaction to acquire Activision Blizzard until the end of its next fiscal year, on June 30, 2023, because it expected heavy regulatory scrutiny. That proved correct, with the U.S. Federal Trade Commission (FTC), UK Competition and Markets Authority (CMA), and EU European Commission all quickly announcing investigations of the deal as expected. And each investigation tellingly dragged into 2023.

But Microsoft also moved quickly, first by addressing the silly worries that Sony voiced about a Microsoft-owned Activision Blizzard making Call of Duty and other key Activision Blizzard titles Xbox exclusives. (Worries we later learned were fabricated: Sony never expected this to happen.) It also explained the genesis of the deal, which occurred in the wake of an explosive Wall Street Journal expose detailing the sexual misconduct problems at Activision Blizzard; the theory here being that Microsoft would be a better steward for Activision Blizzard’s games and employees. (Microsoft, of course, has had its own issues in this area, though the firm has since made important improvements to its discrimination and harassment policies.)

Microsoft’s case for the acquisition has always been strong, as Xbox has been a distant third in the console wars against Sony and Nintendo over its entire 20+ years and four console generations. It has a small presence in PC gaming, and no presence at all in mobile gaming, which is, by far, the biggest part of this market. It is one of the few companies that has invested heavily in cloud gaming—streaming games from its datacenters—but that market isn’t just nascent, it’s almost non-existent and will never replace console, PC, or mobile gaming; Microsoft, tellingly, offers its Xbox Cloud Gaming service only as a perk of its Xbox Game Pass Ultimate subscription, and we now know that most customers only use it trial games before downloading them for a better experience.

More to the point, Microsoft’s competitors already behave more poorly and unfairly. Apple denied Microsoft’s attempts to put Xbox Cloud Gaming in its iPhone and iPad app store because doing so would prevent it from getting a 30 percent vig on every streamed game despite the fact that video streaming services like Netflix do exactly the same thing; Apple, tellingly, has its own Apple Arcade subscription and it is using its gatekeeper role on that platform to harm competition and consumers. And Sony has actually paid game publishers to not put their games on Xbox in a bid to keep its smaller competitor in third place; that this is patently illegal should be obvious to anyone, leading to questions about why it is Microsoft and not Sony in the regulatory hot seat.

Over time, most regulatory bodies approved the acquisition, including even the EU, which is typically one of the more aggressive regulatory bodies. But that’s because Microsoft has done the right thing by reaching out to competing console makers and game subscription services and offering lengthy deals that ensure that Activision Blizzard games will remain on or, in a fun twist, come to, their platforms, in some cases for the first time. Doing so supports Microsoft’s contention that the deal is good for competition and for consumers because these games will be available on more devices, and thus to more consumers, as a result. Numerous Xbox competitors signed up immediately, including Nintendo, the market leader. Only Sony has not. Indeed, Sony never even responded to the request, all the while pushing its provably wrong narratives about how this deal would harm the industry.

Sony’s strategy, oddly, focused on exclusives. Should Microsoft acquire Activision Blizzard, it would be able to do to Sony what Sony has done to Microsoft for over 20 years and release games on its own platform but not on its rival. That this is hypocritical is, of course, obvious, but Microsoft has a history of cross-platform compatibility while Sony has a history of exclusivity. Why shouldn’t Microsoft be allowed to behave the same as a market leader? After all, the very premise of antitrust is that dominant parties are held to a higher behavior standard than their smaller competitors. Using Sony’s confused logic, its smaller competitor should instead not be allowed to be as competitive as it, a market leader, is.

As oddly, some regulators fell for it. And one of them, arguably the most important of all, the FTC, seemed to parrot Sony’s anti-Microsoft propaganda when it announced in December 2022 that it would block the acquisition. That a U.S. regulatory body would seek to protect a Japanese company by preventing a U.S.-based software company from acquiring a U.S.-based games company is beyond ridiculous. That Japan’s FTC in the home country of Sony would then approve this acquisition is the cherry on this shit sundae. You can’t make this stuff up. But I made my opinion clear.

Things really came to a head when the UK CMA indicated that it would approve the acquisition in March 2023 and then blocked it anyway a month later, citing nonsensical concerns about that nonexistent market for cloud streaming games. Once again, I made my opinion clear. Making the CMA’s decision look even more ridiculous, the EU approved the acquisition and then, in a wonderful proclamation, explained why its approach to regulation, and its decision specifically, made more sense than what had happened in the UK and, implicitly, in the U.S.

But by this point, the acquisition timeline was coming down to the wire. Microsoft had expected to complete the transaction by June 30, but its agreement with Activision Blizzard specified a termination date of July 18, with Microsoft on the hook to pay the company a $3 billion “breakup fee” if the deal fails. It appealed the FTC and CMA decisions, but the slow nature of the respective legal systems meant that it would not get its days in court until after that date. And so Microsoft filed an emergency appeal of the FTC decision, with the theory that the UK wasn’t a big enough market to worry about; if it could get past the FTC, it could consummate the deal without the UK’s approval. And it was granted an emergency hearing that would take place quickly, by the end of June 2023.

The hearings did not go well for the FTC, and in the flurry of pre-hearing legal filings, it became clear that the FTC didn’t even understand its role in antitrust regulation. And its legal experts and experts stumbled badly in court, unable to explain how or why Microsoft’s behavior would in any way change the landscape of the video game market. The FTC was thus handed a stunning legal defeat, paving the way to Microsoft acquiring Activision Blizzard after all. Equally stunning, the UK CMA suddenly announced that it was open to renegotiating the acquisition. (Granted, each comes with a caveat. The FTC could appeal. And the jackals at the CMA later scaled back the apparent about-face by stating that it would still need to reinvestigate the deal, an unnecessary process that would delay matters.)

I strongly recommend reading Judge Corley’s heavily redacted decision. She absorbed the information and evidence provided by both sides and came to the right decision, although she is also wrong on some points, as noted below. And the language she uses nicely mimics the arguments I’ve been making for the past 18 months, that this deal does nothing to change the overall structure of the video game market. Put simply, she agrees that there is no reason to block this acquisition.

A few relevant quotes.

“Sony uses its market power to extract other preferential treatment from third-party game developers, including earlier release dates, exclusive marketing agreements, and exclusive in-game content,” she writes of that company. Correct. Sony is the belligerent market leader here, not Microsoft.

“Activision does not allow, and has no plans to allow, its games in multigame subscription libraries [like Xbox Game Pass and PlayStation Plus] upon release. [Its] ‘philosophical aversion’ to subscription services arises from concerns that multigame subscriptions would ‘degrade the economics’ of Activision’s buy-to-play business model, are ‘inconsistent with the idea of starting out with free-to-play as the way that you build game universes and franchises,’ and possibly could lead to substantial cannibalization.” Also correct, and while it’s impossible to say how Microsoft will handle day-one releases, getting Activision’s catalog games (like older Call of Duty titles) on Xbox Game Pass—and, seriously, on PS Plus—plays into its plans to make these games available to more people.

“Cloud gaming (also known as cloud game “streaming”) is a potential alternative delivery mechanism to downloading native games for play onto hardware.” This is incorrect: Cloud gaming is about streaming, not downloading, and the limits of bandwidth, lag, and latency mean that these offerings will always be compromised, especially for multiple titles.

“Although the Agreement allows either party to terminate the merger agreement if the transaction has not closed by July 18, 2023, and appears to obligate Microsoft to pay Activision a termination fee of $3 billion, the FTC did not file this action to preliminarily enjoin the merger until June 12, 2023—less than six weeks before the termination date.” Nice dig at the FTC there. And seriously, it had 18 months to investigate this deal by then, and to negotiate with Microsoft on potential remedies that would avert the FTC blocking it.

“The FTC seeks to limit the console market to Gen 9 consoles from Xbox X|S and the PS5, and exclude the Nintendo Switch [which is the overall market leader by a wide margin],” she writes regarding the relevant market definition; the FTC wants this distinction because including the Switch makes Xbox look even smaller by comparison. “If the Court was the final decisionmaker on the merits, it would likely find Nintendo Switch part of the relevant market. But it is not … the FTC has met its preliminary injunction burden to show the Switch is not included in the relevant market.” I personally disagree with this, but whatever: Xbox is still a minority player compared to the dominant Sony PlayStation.

And the big one (to me).

“The FTC insists the combined firm [Microsoft/Activision] may deprive rivals—primarily Sony—of a fair opportunity to compete in the above-defined markets by foreclosing an essential supply—Call of Duty … [But] the Court finds the FTC has not shown a likelihood of success on its claim the combined firm would have an incentive to, and thus probably would, foreclose Call of Duty from Sony PlayStation. First, immediately upon the merger’s announcement, Microsoft committed to maintain Call of Duty on its existing platforms and even expand its availability … Microsoft even took steps to expand Call of Duty to non-Microsoft platforms … Second, the deal plan evaluation model presented to the Microsoft Board of Directors to justify the Activision purchase price relies on PlayStation sales and other non-Microsoft platforms post-acquisition … Third, the deal plan evaluation model reflects access to mobile content was a critical factor weighing in favor of the deal … the combined firm is not incentivized to withhold Call of Duty merely to aid the shrinking console market. Fourth, Microsoft executives consistently testified there are no plans to make Call of Duty exclusive to the Xbox.”

This one goes on and on and on. But this next one is the most crucial bit.

“Fifth, there are no internal documents, emails, or chats contradicting Microsoft’s stated intent not to make Call of Duty exclusive to Xbox consoles. Despite the completion of extensive discovery in the FTC administrative proceeding, including the production of nearly 1 million documents and 30 depositions, the FTC has not identified a single document which contradicts Microsoft’s publicly stated commitment to make Call of Duty available on PlayStation (and Nintendo Switch).”

There are more points. But I think that pretty much says it all. The FTC is out of control. Microsoft should be allowed to finalize this transaction and acquire Activision Blizzard. And Judge Corley got it right, despite a few errors that didn’t tilt the scales unfairly.

Common sense prevails.