Why is the FTC suing Microsoft over its Activision Blizzard merger?

9 Dec 2022

Image: © Rafael Henrique/Stock.adobe.com

Like regulators in the EU and UK, the FTC is concerned that the deal could stifle competition in the gaming sector.

Microsoft’s plan to acquire gaming giant Activision Blizzard has a major challenge ahead, as a US regulator is seeking to prevent it.

The Federal Trade Commission (FTC) has sued to block the $69bn deal due to competition concerns within the gaming industry.

Microsoft is already a strong contender within this industry with Xbox and its growing subscription service Xbox Game Pass. The FTC said if the Activision Blizzard deal goes ahead, it would enable Microsoft to “suppress competitors”.

The software company shocked the global gaming world in January when it announced plans to snap up Activision Blizzard, the video game publisher behind Call of Duty and Candy Crush.

If it goes ahead, it will be the biggest gaming acquisition ever recorded and will make Microsoft the third-largest gaming company by revenue, behind Tencent and Sony.

What are the FTC’s biggest concerns?

The FTC said Microsoft already has a record of acquiring and using gaming content to suppress competition from rival consoles.

The US authority referenced Microsoft’s acquisition of ZeniMax, the parent company of game developer Bethesda. After this deal, Microsoft made several Bethesda titles exclusive to Xbox after assuring European antitrust authorities that this would not happen, according to the FTC.

“Microsoft has already shown that it can and will withhold content from its gaming rivals,” said FTC bureau of competition director Holly Vedova. “We seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”

The US regulator said Activision Blizzard currently has a strategy of offering its games on many devices, regardless of the producer.

The FTC warned that Microsoft could harm consumers if the acquisition goes ahead, by manipulating pricing, degrading the game experience on rival consoles or “withholding content from competitors entirely”.

Is Microsoft’s acquisition facing problems elsewhere?

The mammoth acquisition is also under scrutiny by regulators in the UK and the EU. Earlier this year, The UK’s Competition and Markets Authority said that the acquisition of Activision Blizzard could “harm rivals” and “substantially lessen competition” in the gaming sector.

The UK authority is conducting a phase two investigation into the acquisition, to see what the impact would be for the gaming sector and other console platforms.

Meanwhile, the European Commission’s preliminary investigation found that the deal could “significantly reduce competition” in the distribution market for console and PC video games. It could also impact the markets of multi-game subscription services and cloud game streaming services.

As a result, the Commission launched an in-depth investigation into the acquisition last month and has until 23 March 2023 to reach a decision on the deal. EU competition chief Margrethe Vestager said this probe will assess “how the deal affects the gaming supply chain”.

The Commission said it is particularly concerned Microsoft may “foreclose access” to Activision Blizzard’s games, including high-profile titles such as the Call of Duty franchise.

Earlier this week, Microsoft said it had entered into a 10-year commitment with Nintendo to bring the popular Call of Duty game franchise to the rival console. It is possible this agreement could be used to ease antitrust fears surrounding the deal.

Microsoft executives also met with FTC chair Lina Khan and other commissioners this make to make their final case for the deal to go ahead, Bloomberg reports.

Has the FTC blocked other deals like this?

If successful, this won’t be the first time the FTC has helped stop a mammoth acquisition from going ahead.

Last year, Nvidia’s plans to acquire UK chip designer Arm faced one of several major roadblocks when the FTC sued to stop the deal.

This proposed acquisition faced a similar uphill battle to Microsoft’s plans, with concerns raised by the UK’s competition watchdog and then from the EU.

Last December, The FTC said Arm’s technology is a critical input that enables competition between Nvidia and its competitors in several markets. It said the proposed merger would give Nvidia the ability and incentive to use its control of this technology to “unfairly undermine” competitors.

Under pressure from several investigations and the FTC’s move to block the deal, Nvidia cancelled the proposed $40bn acquisition in February.

What happens next?

The FTC voted to issue an administrative complaint and said this marks the beginning of a proceeding in which the “allegations will be tried in a formal hearing before an administrative law judge”.

The case will take time, however, as a judge will not hear evidence until 23 August 2023, according to the FTC complaint.

Microsoft is also prepared to defend its proposed acquisition in court. The company president Brad Smith tweeted that Microsoft has been committed to addressing competition concerns “since day one”.

“While we believe in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present it in court,” Smith said.

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Leigh Mc Gowran is a journalist with Silicon Republic