Introduction

In January 2022, Microsoft announced their intention to acquire Activision[1], a developer of video games for consoles, PCs and mobile devices.[2] While the Microsoft-Activision deal has received the approval from Chile, Brazil, Saudi Arabia, and several other countries,[3] the FTC filed an antitrust case in December 2022 to block the acquisition.[4] Recently, in a major blow to the proposed acquisition, the UK has decided to block the deal.[5] Considering both the proposed Microsoft-Activision merger and FTC lawsuit, this paper analyzes antitrust policy around vertical mergers and the stance of both the federal government and the global antitrust authorities towards the increasing power of technology companies.

Global Changes in Antitrust Enforcement

Competition authorities around the world are enforcing increasingly strict rules in response to the growing control of big tech companies in the market and popular concern about privacy and misinformation.[6] For example, the German regulatory authority opened investigations into Alphabet (Google), Facebook and Amazon’s data practices in May 2021.[7] In December 2021, Italy fined Amazon 1.13 billion euros for alleged abuse of market dominance.[8] Margrethe Vestager, Europe’s antitrust chief, has called for a unified global approach towards Big Tech to prevent companies from exploiting enforcement gaps between jurisdictions.[9]

Additionally, the Digital Markets, Competition, and Consumer Bill, which recently passed in the UK, provides the Digital Markets Unit (DMU) with the authority to levy fines on companies using their market power unfairly to distort or undermine competition. [10]  These fines amount to 10% of the companies’ annual turnover,[11] which refers to their total revenues, and can significantly impact their profits. By implementing this system of fines, the UK government aims to ensure that companies comply with a code of conduct and prevent them from engaging in anticompetitive behavior. [12] These enforcement measures incentivize companies to comply with the law by deterring abuse of dominant market positions, with the goal of protecting the interests of consumers.[13]

Big Tech firms may need to make significant changes to their business models in response to stricter antitrust enforcement.[14] For instance, they may need to adjust their pricing strategies to offer more competitive prices. They may also need to improve their security measures and be more transparent with users about data collection and usage to avoid violating privacy or consumer protection laws. In order to reduce the risk of enforcement actions or investigations, Big Tech firms could participate in industry initiatives or proactively work with regulators to develop new standards and guidelines. Engaging with government and industry regulation efforts would help demonstrate their commitment to compliance and proactively address potential issues before they arise.

United States Antitrust

Antitrust laws in the United States are designed to promote fair competition and prevent monopolistic practices in the marketplace. Since the Sherman Antitrust Act was passed in 1890, the government has taken an active role in regulating businesses through the Antitrust Division of the Department of Justice and the Federal Trade Commission to ensure that businesses do not engage in anti-competitive behavior.

Lina Khan – Trends towards Stricter Enforcement

Since Lina Khan’s appointment as the chair of the Federal Trade Commission (FTC), the agency has taken a more aggressive stance towards antitrust enforcement.[15] This includes withdrawing the previous vertical merger guidelines, which were deemed insufficiently robust.[16] Khan has pushed the FTC to file cases that push antitrust law forward, even if they have a higher risk of failure.[17] Her more aggressive approach towards antitrust enforcement, including the agency’s efforts against the Microsoft-Activision acquisition, aligns with her counterpart at the Justice Department’s antitrust division, Jonathan Kanter.[18]  Both Khan and Kanter aspire for their agencies to take bolder actions and share the belief that a high success rate in court suggests that they are not taking on sufficiently challenging cases.[19]

Microsoft-Activision Merger

The proposed acquisition of Activision by Microsoft would make Microsoft one of the biggest players in the gaming industry and has raised concerns about creating market power that Microsoft could wield to stifle competition.[20] The potential effects on competition have drawn intense scrutiny from antitrust regulators in several countries. The UK, EU, and US authorities responded to the Microsoft-Activision deal by threatening Microsoft with a probe.[21] The UK has decided to block the deal over concerns that it would hinder competition in cloud gaming.[22] The FTC, under the leadership of Lina Khan, has been particularly critical of the merger. The agency has been investigating the deal and has expressed concerns about the potential impact on competition in the gaming industry. [23]

Microsoft intends to expand Activision’s presence in mobile gaming by making their games more accessible to consumers across platforms. This would include making popular Activision favorites like Call of Duty more broadly available[24] and innovating new features such as the ability for the consumer to play the same game on multiple devices.[25] Microsoft intends to use the preferred merger to expand the number of games offered through its streaming service and attract more customers. They intend to create a similar phenomenon to movie and television markets, where consumers have increasingly turned to the convenience and affordability of streaming services.[26]

Reactions to the Deal

Sony has been the main opponent of the merger, stating to the FTC and regulators in other countries that if Microsoft were to make popular games like Call of Duty exclusive to its platform, Sony’s ability to compete would be significantly harmed,[27] arguing that it would limit choices for gamers and developers. While Microsoft’s acquisition of Activision is seen as part of its strategic move to acquire valuable content at incontestable prices,[28] Sony’s opposition highlights the growing concerns about consolidation in the tech industry and its impact on market competition. Even though Microsoft has offered Sony a 10-year agreement,[29] Sony has remained adamant about pushing regulators in Europe and the US to block the $68.7 billion acquisition.[30]

According to sources familiar with the matter, Google is also against the deal.[31] The company has claimed that Microsoft intentionally reduced the quality of its Game Pass subscription service when used with Google’s Chrome operating system.[32] Further, it has stated that the Microsoft-Activision merger would create additional incentives to steer hardware sales towards itself and away from Google.[33]

In addition to Microsoft’s competitors, a group of video game players filed a lawsuit before the US District Court of the Northern District of California claiming that the Microsoft-Activision merger could result in negative effects such as higher prices, reduced innovation and creativity, limited consumer choice, decreased output, and other potential anticompetitive impacts.[34] The lawsuit was initially dismissed on March 21, 2023, but the plaintiffs were granted 20 days to improve their legal argument.[35] They have since submitted an amended complaint, which includes new information supplied by Sony.[36]

FTC Position

Since Microsoft produces the Xbox video game console and offers a leading video game subscription service called Xbox Game Pass,[37] the acquisition is considered a vertical merger as a leading distribution platform is acquiring a top content maker.[38] A vertical merger is one where the merging firms are on different levels of the chain of manufacture and distribution of a product and so do not compete with one another. There have been fewer challenges to vertical mergers than horizontal agreements and many attempts to block vertical mergers have been unsuccessful in the past.[39] Examples of unsuccessful vertical merger challenges include AT&T’s acquisition of Time Warner, United Health’s acquisition of Change Healthcare,[40] and Meta’s acquisition of Within. However, antitrust enforcement did cause Nvidia to abandon its proposed acquisition of Arm and Lockheed Martin abandon its proposed acquisition of Aeroject Rocketdyne.[41]

Vertical mergers, like the Microsoft-Activision merger, raise concerns about input foreclosure of competitors.[42] The FTC claims that the merger is harmful to market competition as Microsoft could abuse their position to raise prices or prevent competing distributors from obtaining the product or prevent consumers of the product from using competing platforms.[43] They argue that post-merger, Activision’s incentives would change due to profits Microsoft would gain by making Activision’s content exclusive to drive adoption of Microsoft’s products.[44]

Additionally, the deal would enable Microsoft to suppress competitors to its gaming console as well as its subscription and cloud-gaming businesses.[45] The FTC also cites Microsoft’s history of suppressing competition through acquisitions, including the 2021 ZeniMax deal, where despite promises to the European Commission antitrust officials, Microsoft made three ZeniMax games exclusive to Xbox.[46]

Microsoft’s Defends the Merger

In response the FTC’s complaint about Microsoft’s $68.7 billion acquisition of Activision, Microsoft has argued that the revenues earned from Call of Duty sales on rival platforms serve as a financial incentive against reducing the access or quality of experience on those platforms.[47] Additionally, a YouGov survey commissioned by Microsoft in January, found that only 3% of all PlayStation users would switch to buying an Xbox if Microsoft pulled Call of Duty from PlayStation.[48]

Furthermore, Microsoft has rebutted FTC’s Zenimax argument by stating that it had made clear to European regulators it would approach exclusivity for future game titles on a case-by-case basis.[49] Historically, Microsoft has kept many of its properties widely available. Microsoft has also evidenced its intent to make Activision’s content more broadly available by signing deals with Nvidia to make Xbox PC games available on their rival cloud gaming service GeForce Now.[50] They’ve signed similar deals with Nintendo and Steam[51], promising to release of Call of Duty games on their platforms on the same day they come out on Xbox with full feature and content parity.[52] Microsoft has claimed that they will do the same for any other game console.[53]

Conclusion

Microsoft argues that their acquisition of Activision could generate corporate synergies, innovation in gaming, and consumer-value enhancing efficiencies. However, with the UK competition authority blocking the deal, the FTC’s persistent attempts to do the same, the acquisition for Microsoft has become increasingly costly and uncertain. While previous antitrust enforcers have used their concerns about vertical mergers to secure settlements that allowed deals to move forward with conditions to alleviate potential harms to consumers, FTC Chair Lina Khan has been critical of the effectiveness of such settlements.[54] The ongoing opposition to the Microsoft-Activision acquisition demonstrates both Khan’s opposition towards vertical mergers as well as broader trends in increasing scrutiny about competition in ‘Big Tech’ markets, both in the U.S. and abroad.

 

[1] Microsoft News Center, “Microsoft to acquire Activision blizzard to bring the joy and community of gaming to everyone, across every device”, January 18, 2022, Microsoft, < https://news.microsoft.com/2022/01/18/microsoft-to-acquire-activision-blizzard-to-bring-the-joy-and-community-of-gaming-to-everyone-across-every-device/>, Last accessed [May 14, 2023].

[2] Debbie Feinstien & Bryan M. Marra, “FTC Sues to Block Microsoft’s Acquisition of Activision-Blizzard, Challenging a Vertical Transaction in the video Game Industry”, January 04, 2023, Arnold & Porter, < https://www.arnoldporter.com/en/perspectives/advisories/2023/01/ftc-sues-to-block-microsofts-acquisition-of-acti>, Last accessed [April 09, 2023].

[3] Oli Welsh, “What’s happening with Microsoft’s acquisition of Activision Blizzard”, Polygon, < https://www.polygon.com/23546288/microsoft-activision-blizzard-acquisition-deal-merger-ftc-latest-news>, Last accessed [April 09, 2023].

[4] Jordan Novet & Lauren Feiner, “FTC sues to block Microsoft’s acquisition of Activision Blizzard”, CNBC, < https://www.cnbc.com/2022/12/08/ftc-sues-to-block-microsofts-acquisition-of-game-giant-activision-blizzard.html>, Last accessed [April 09, 2023].

[5] Paul Sandle, “UK Blocks Microsoft’s $69 billion Activision deal over cloud gaming concerns”, April 26, 2023, Reuters, <https://www.reuters.com/markets/deals/uk-blocks-microsoft-69-bln-activision-deal-over-cloud-gaming-concerns-2023-04-26/>, Last accessed [May 14, 2023].

[6] Elvira Pollina and Maria Pia Quaglia, “Italy fines Amazon record $1.3 bln for abuse of market dominance”, December 09, 2021, Reuters, < https://www.reuters.com/technology/italys-antitrust-fines-amazon-113-bln-euros-alleged-abuse-market-dominance-2021-12-09/>, Last accessed [April 16, 2023].

[7] Kristi Knolle, “German antitrust watchdog investigates Google over data use”, May 25, 2021, Reuters, https://www.reuters.com/technology/german-antitrust-watchdog-launches-proceedings-against-google-2021-05-25/, Last accessed [April 16, 2023].

[8]  Supra at Footnote 6.

[9] Foo Yun Chee, “EU antitrust chief calls for global approach towards tech giants”, Reuters, May 05, 2022, < https://www.reuters.com/technology/eu-antitrust-chief-calls-global-approach-towards-tech-giants-2022-05-05/>, Last accessed [April 16, 2023].

[10] Tom Bristow, “Big Tech lobbyists get stuck in to UK’s landmark competition bill”, April 03, 2023, Politico, < https://www.politico.eu/article/the-fight-over-the-uks-landmark-competition-bill-heats-up/>, Last accessed [April 16, 2023].

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Supra at Footnote 2.

[16] Brent Kendall & Dave Michaels, “Microsoft Case Poses Crucial Test for FTC’s Fight Against ‘Vertical’ Mergers”, December 09, 2022, The Wall Street Journal, https://www.wsj.com/articles/microsoft-case-poses-crucial-test-for-ftcs-fight-against-vertical-mergers-11670617455, Last accessed [April 09, 2023].

[17] Karen Weise and David McCabe, “F.T.C. Sues to Block Microsoft’s $69 Billion Acquisition of Activision”, December 08, 2022, The New York Times, < https://www.nytimes.com/2022/12/08/technology/ftc-microsoft-activision.html>, Last accessed [April 17, 2023].

[18] Zack Zwiezen, “Everything That’s Happened In The Microsoft – Activision Merger Saga”, February 13, 2023, Kotaku, < https://kotaku.com/microsoft-activision-xbox-merger-timeline-call-of-duty-1850108022>, Last accessed [April 09, 2023].

[19] Id.

[20] Supra at Footnote 2.

[21] Contributor to The London Financial, “Microsoft’s $75 bn Acquisition Of Activision Raises Monopoly Concerns”, December 26, 2022, The London Financial, < https://www.thelondonfinancial.com/law/microsofts-75bn-acquisition-of-activision-raises-monopoly-concerns> Last accessed [April 09, 2023].

[22] Supra at Footnote 5.

[23] Supra at Footnote 2.

[24] Supra at Footnote 2.

[25] Brian Fung, “FTC sues to block Microsoft’s $69 billion acquisition of Activision Blizzard”, December 08, 2022, CNN < https://www.cnn.com/2022/12/08/tech/ftc-microsoft-activision-blizzard-acquisition/index.html>, Last accessed [April 17, 2023].

[26] Saul Anuzis, “The FTC should settle the Microsoft-Activision dispute”, February 26, 2023, Washington Examiner, < https://www.washingtonexaminer.com/restoring-america/faith-freedom-self-reliance/the-ftc-should-settle-the-microsoft-activision-dispute>, Last accessed [April 20, 2023].

[27] Josh Sisco, “Feds likely challenge Microsoft’s $69 billion Activision takeover”, November 23, 2022, Politico, < https://www.politico.com/news/2022/11/23/exclusive-feds-likely-to-challenge-microsofts-69-billion-activision-takeover-00070787>, Last accessed [April 19, 2023].

[28] Id.

[29] Evgeny Obedkov, “Microsoft says only 3% of PlayStation players to switch consoles if Call of Duty becomes Xbox exclusive”, March 07, 2023, Game World Observer, < https://gameworldobserver.com/2023/03/07/microsoft-cma-playstation-players-switch-consoles-cod-xbox-exclusive>,  Last accessed [April 20, 2023].

[30] Id.

[31] Supra at Footnote 32.

[32] Supra at Footnote 32.

[33] Supra at Footnote 32.

[34] Mike Scarcella, “Microsoft wins dismissal of gamers’ suit over $69 billion Activision deal”, March 21, 2023, Reuters, < https://www.reuters.com/legal/microsoft-wins-dismissal-gamers-suit-over-69-bln-activision-deal-2023-03-21/>, Last accessed [April 20, 2023].

[35] Id.

[36] Dustin Bailey, “The “Gamer’s Lawsuit” against Microsoft is back, and Sony is helping”, April 11, 2023, Gamersradar+, < https://www.gamesradar.com/the-gamers-lawsuit-against-microsoft-is-back-and-sony-is-helping/>, Last accessed [April 20, 2023].

[37] Supra at Footnote 2.

[38] Id.

[39] Supra at Footnote 2.

[40] Id.

[41] Id.

[42] Id.

[43] Id.

[44] Id.

[45] Microsoft/ Activision Blizzard, In the Matter of, April 03, 2023, Case Summary, FTC Matter/ File Number: 2210077, Docket Number 9412, https://www.ftc.gov/legal-library/browse/cases-proceedings/2210077-microsoftactivision-blizzard-matter, Last accessed [April 16, 2023].

[46] Supra at Footnote 21.

[47] Supra at Footnote 34.

[48] Supra at Footnote 34.

[49] Matt O’Brien and The Associated Press, “Microsoft steps up to antitrust fight with FTC over $69 billion Activision acquisition”, December 23, 2022, Fortune, < https://fortune.com/2022/12/23/microsoft-steps-up-to-antitrust-fight-with-ftc-over-69-billion-activision-acquisition/>, Last accessed [April 20, 2023].

[50] Supra at Footnote 2.

[51] James Batchelor, “FTC files lawsuit to block Microsoft’s Activision Blizzard acquisition”, December 08, 2022, Games Industry.biz, < https://www.gamesindustry.biz/ftc-files-lawsuit-to-block-microsofts-activision-blizzard-acquisition>, Last accessed [April 20, 2023].

[52] Supra at Footnote 2.

[53] Supra at Footnote 10.

[54] Supra at Footnote 19.