A Tale of Two (OK, Three) Antitrust Regulators (Premium)

The U.S. Federal Trade Commission (FTC) and UK Competition and Markets Authority (CMA) were both embarrassed in recent weeks by Microsoft when their justifications for blocking the Activision Blizzard acquisition were exposed as irrational nonsense. And both regulatory bodies have been forced to scramble to reach a settlement with the software giant that will help them save face by appearing to do their jobs while succumbing to their inevitable defeats. In the wake of these defeats, it’s interesting to see representatives from each agency discuss what happened publicly.

First, let’s recap what happened. Because I’ve argued these points so many times, I’ll just summarize them here.

In the U.S., the FTC was given the mandate to rein in Big Tech at all costs by the Biden administration and thus blocked the acquisition in December 2022 because Microsoft “can and will withhold content from its gaming rivals,” a practice those dominant rivals do exponentially more often, specifically Call of Duty, a title that Microsoft promised to both of those rivals for 10 years. Despite the “economically irrational” nature of this argument, the FTC engaged in a series of legal hearings to press its case, losing handily when a federal judge reviewed its non-existent evidence. “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),” she wrote. There is a lot more to this, but today Microsoft and the FTC are negotiating a settlement.

In the UK, the CMA blocked the acquisition in April on the basis that Microsoft, an also-ran in the console market and a non-entity in mobile gaming, might someday dominate a non-existent market for game streaming, despite the fact that its service is only made available as a perk of another online service because it is technically unviable on its own and likely always will be. But after the FTC lost, the CMA engaged in an almost comical series of backtracking, with the end result that it, like the FTC, is now talking to Microsoft again and trying to reach terms that are acceptable to both sides.

Since these historic and unprecedented defeats, representatives from both agencies have emerged into the light and have discussed what happened. And while there isn’t a lot to work with here, I find their respective summaries of their defeats to be interesting.

FTC commissioner Lina Khan, fairly or not, is widely criticized for not choosing her regulatory actions more selectively, and it’s probably fair to say that her inexperience has led to some bad decisions. As I opined in the wake of last December’s FTC decision, it is astonishing that this agency would pursue this legally defensible acquisition using imaginary worries about the future when Big Tech firms like Amazon, Apple, Google, and Meta are abusing very real monopolies every day.

Khan is 0-2 against Big Tech this year, having lost big cases against Meta and Microsoft, both key members of the Big Tech brat pack. And yet she defended her record during a recent speech.

“In federal court, we have lost two merger cases,” she said, as quoted by Bloomberg. “We have brought somewhere between 13 and 20 [cases overall], depending on how you count … In the scheme of our merger enforcement program, losing two is OK.”

Um, OK. I guess going 20-2 looks good on paper, in the best-case scenario. But the scope of each case matters, and it’s probably obvious to most that the cases she and the FTC lost were the two biggest of that group by far.

During this speech, Khan acknowledged that “the [vertical] nature” of the Microsoft deal made the FTC’s legal challenge “difficult.” That is, Microsoft doesn’t compete directly with Activision today, they are instead two complementary players in the broader market for video games, and neither is in any way dominant in any gaming sub-market in which they participate.

“There’s no question that vertical mergers are tougher to litigate,” she said.

Khan also testified before a U.S. House Judiciary Committee hearing two weeks ago, during which she endured over three hours of partisan bullying and harassment. I don’t approve of that, despite my criticism of her overall regulatory strategy. But she said little that was specific about Microsoft, regardless, and so we’ll just move on from that. (She faced a similar hearing after her loss against Meta.)

And then there’s the UK, where the CMA was curiously critical of the EU’s European Commission (EC) after that agency OK’d the Microsoft acquisition of Activision Blizzard but has been largely silent since, aside from issuing statements regarding its Benny Hill-like machinations in the wake of the FTC loss. But CMA CEO Sarah Cardell broke the silence last week at the end of an unrelated interview with the BBC on July 20.

“You initially moved to block Microsoft’s taken of Activision Blizzard, [but] it now looks as though you’ve compromised with the parties involved here,” the interviewer said, shifting the topic. “Some people are accusing you of having caved in to pressure from Microsoft. What would you say to them?”

“I say we certainly haven’t compromised,” she answered.  “Our decision to prohibit the deal stands. We understand from Microsoft that they would like to put forward proposals to us to restructure the deal, potentially re-notifying that deal to address our competition concerns. If they do that, we will consider those restructured proposals carefully. But anything that they put forward to us will need to fully and comprehensively resolve our concerns. Our position on that hasn’t changed.”

That’s unfortunate because the CMA’s concerns, as noted, are nonsensical and easily debunked. And when she was asked when those proposals would come, she stated that the CMA was “waiting for those proposals to come to us.” This is contrary to the CMA statement of July 15 in which the agency stated that it had received a “detailed and complex submission” from Microsoft that seemed to satisfy its concerns. Interesting.

In defeat, both Khan and Cardell, and thus both the FTC and CMA, have yet to acknowledge the tenuous and illogical nature of their respective complaints about the Microsoft/Activision Blizzard merger, and it’s possible we’ll never get much-needed apologies or admissions from either. This could just be face-saving—a lot of antitrust regulation is what I call “fake hustle,” the appearance that one is doing their job so that some coming approval or settlement appears to be the result of actual negotiation and debate—or they could simply believe that their house-of-straw arguments against the acquisition are somehow sound.

I have a hard time believing that the latter is true. Instead, it appears that the FTC and CMA, which were working in concert, instead decided that Big Tech acquisitions are generally bad and that with both blocking this deal, they could delay the acquisition long enough so that one party or both would simply give up. As I noted earlier, this isn’t a bad strategy. But when their nonsensical arguments were challenged, especially in the case of the FTC and its federal court hearings, they collapsed instantly under the harsh light of scrutiny. As they should.

Look, Big Tech is far too powerful, and it needs to be regulated. But each case needs to stand on its own merits, and while some if not most Big Tech deals should be blocked, the Microsoft/Activision deal, despite its mammoth size, does not in any way harm competition or consumers. More incredibly, in the wake of all of the 10-year deals and concessions Microsoft has made, this deal with now inarguably benefit both competition and consumers. I can’t recall an acquisition, Big Tech or otherwise, that has withstood this level of scrutiny, let alone one that has emerged on the other side in even better shape.

Here, as is so often the case, EU competition commissioner Margrethe Vestager got it right.

“Some people think that agencies should either block or clear mergers, nothing in between,” she said during a May speech after her agency had approved the acquisition and the CMA had not. “So if you block you are a ‘tough’ enforcer, if you clear, well, let’s just say you are not perceived as tough. That is not our policy. The European Courts have held that we cannot, as a matter of principle, dismiss remedy proposals. We have to investigate the merits of every solution offered … The criteria are stringent. But it is important that we have this flexibility … There will be cases where … the market will not necessarily be better off if we block the merger.”

Then she got specific. And her defense of the Microsoft deal is a master class in decision-making.

“We believe the Microsoft/Activision merger—with appropriate remedies—in fact represents a positive development,” she said. “We looked at impacts on gamers today and in the future – whether they play on PC, console, or on their phones. We focused on the development of cloud streaming, which will play an increasing role in how consumers access games. An important finding was that the overall market share for Microsoft and Activision was generally low in Europe. It’s only when you look at specific segments like ‘shooter games’ that you get to above 20 percent. And for consoles, Sony sells about four times more PlayStations than Microsoft sells Xboxes.”

“With this context, we did not think the merger raised a vertical issue … We found that Microsoft would probably not shoot itself in the foot by stopping sales of Call of Duty games to the much larger PlayStation player base … Where we did have concerns was in cloud gaming – still a nascent market but one we expect to grow … Where we diverged with the CMA was on remedies. We accepted a 10-year free license to consumers to allow them to stream all Activision games for which they have a license via any cloud service … To us, this solution fully addressed our concerns. And on top of that, it had significant procompetitive effects.”

“These types of remedies are the minority of our cases, by far. But when they work, why deprive ourselves of the option? This is what useful enforcement is all about.”

Yes, it is.

Folks, that’s not fake hustle, it’s just regular hustle. It’s about being on the right side of history or, more generally, just being right. To date, Vestager is the only leader of a major antitrust agency to eloquently defend its decision on Microsoft/Activision Blizzard. And that’s not coincidental: unlike with the FTC and CMA, the EU decision was based on facts and common-sense remedies, not nonsense. And while we must still endure the fake hustle settlements to come with the face-savers at the FTC and CMA, their public pronouncements about this case are, so far, as content- and fact-free as their original decisions against it. There’s nothing they can say.

But that makes sense. You can’t defend the indefensible.