Is the biggest proposed merger in video game history dead? That’s what I’ve been contemplating ever since the Federal Trade Commission filed an administrative complaint on Dec. 8 contending that Microsoft’s $68.7 billion acquisition of Activision Blizzard would substantially lessen competition. Sure, headline writers made the fate of this merger seem like something less than a fait accompli, and that the government was merely “suing to block” the deal. But I wonder if giving Microsoft any shot here undersells what has just happened. Especially in light of what’s known about the F.T.C. adjudicative hellscape, the details of this particular merger agreement, and finally, how badly Lina Khan wants a win.
Wall Street, of course, has been hedging its bets for months. Yes, there was a clear industrial logic behind Microsoft, with its underrated Xbox business and strong cash position, buying up Activision, the behemoth video game publisher, especially amid various sexual harassment and discrimination scandals that helped convince C.E.O. Bobby Kotick it was time to sell. Still, thanks to Joe Biden’s very aggressive regulators, investors have harbored serious doubts whether the deal would close. Under the terms of the merger, Microsoft would pay $95 a share for Activision. Despite such generosity, the game publisher’s stock hasn’t traded past $86 at any time this past year. Currently, it’s at $75. Meaning, anyone who wants to bet on the merger actually happening would make a killing if it really does.
It’s not like the Biden administration has a slam-dunk case. According to the government, Microsoft might deprive its console rival Sony of important Activision titles like Call of Duty, Diablo and Overwatch if the deal went forward. OK, but exclusives have long been a feature of the video game industry. What would change? Even if those particular titles represent a piece of intellectual property so valuable that Playstation collapses as a result of not having them, this state of affairs would still leave Microsoft competing with a smaller competitor like Nintendo, plus personal computers and mobile devices capable of hosting games, too. In other words, what market is Microsoft allegedly monopolizing? Are there really no product substitutes? Are the barriers to entry for new cloud and subscription services really that high?
Of course, we’ll surely see Microsoft challenging the government’s position with respect to these questions. Brad Smith, vice chair and president of the company, says, “We have complete confidence in our case and welcome the opportunity to present it in court.” Unfortunately for Microsoft, this isn’t your typical competition case. With the game clock ticking, this dispute may never make it to a real court.
Lina’s Home Field Advantage
Microsoft drew the short straw earlier this year when the Activision acquisition landed at the F.T.C. instead of the Department of Justice. At the time, there was real suspense about which group of Biden’s regulators would handle this review: The F.T.C. has traditionally policed the video game industry while the D.O.J.’s antitrust division has deep familiarity with Microsoft from its landmark case against the tech giant at the turn of the century.
The stakes were high. Had assistant attorney general Jonathan Kanter led the review, Microsoft wouldn’t necessarily dodge a challenge, but the D.O.J. would be obligated to go to a federal court to show the transaction violated competition law. There, Microsoft might have a fighting chance sticking up for its acquisition, following AT&T’s success a few years back when the government challenged its Time Warner acquisition, an analogous vertical merger between a content platform owner and supplier.
In contrast, while the F.T.C. will sometimes file in federal court to stop the immediate consummation of a deal (such as the current battle to stop Mark Zuckerberg’s Meta from acquiring the virtual reality fitness app Within), the agency also battles anti-competitive mergers internally before an administrative judge. There, the standards for stopping a deal are lower, or that’s at least the perception among many in the legal community. And if the F.T.C. loses before an administrative judge—and it very, very rarely does—it may appeal before the full commission. In other words, to themselves. That includes F.T.C. chair Lina Khan, the 33-year-old legal supernova who has vowed to put the kibosh on consolidation. Only then will the merging parties get to federal court—to the D.C. Court of Appeals and maybe even to the U.S. Supreme Court.
All that takes years. For example, the F.T.C. is currently in the midst of an internal proceeding aimed at preventing gene-sequencing giant Illumina from acquiring Grail, a cancer test start-up. An administrative complaint was filed back in March 2021, and while an administrative judge surprisingly favored Illumina (citing the AT&T ruling), it took 18 months to get there. The September ruling is now on appeal with no end date in sight.
Has anyone attempted to speed things up? Well, yes: Axon Enterprises, a supplier of weapons to law enforcement and the military, attempted in 2018 to acquire a smaller competitor, only to be caught up in an adjudicative proceeding. The company then sued to enjoin the F.T.C., claiming among other things that the mysterious “clearance” process by which transactions end up either at the D.O.J. or F.T.C. amounts to a due process violation. On Nov. 8, the Supreme Court heard oral arguments, and there’s a very good chance that the conservatives on the bench shake up the so-called administrative state by allowing early constitutional challenges to F.T.C. proceedings rather than make parties wait for final agency actions before suing. That decision will come sometime next spring.
For now, Microsoft is facing the prospect of having to endure a very lengthy proceeding—and one that’s stacked against them. Meanwhile, Microsoft and Activision only have until July 18 to close the transaction under the terms of their merger agreement. The deadline can be extended if both companies consent, and maybe a favorable Supreme Court decision plus a lack of debt financing on this transaction make that a possibility. But then again, Activision is set to get a $3 billion termination fee for basically letting this merger collapse under the weight of a government challenge. That’s an awfully big windfall, and something that complicates a renegotiation even beyond the many years of litigation that it might take to bring this merger to fruition. (Kotick owns millions of shares and figures to score big upon an exit. Then again, there are other suitors, and Activision’s board recently eliminated a “transformative transaction award” he was set to receive for leading the Microsoft deal.) Needless to say, if this deal isn’t dead yet, it’s bleeding out.
Another possibility also exists: a settlement between the government and Microsoft. Already, Smith has been pursuing this angle by offering Sony a 10-year license on new Call of Duty games. Theoretically, the F.T.C. could push for more. But does Khan have any interest in that? (The transaction would also have to clear European and Chinese regulators, too.)
If so, that result would mirror what happened a decade ago when Comcast acquired NBCUniversal. At the time, Comcast’s competitors spoke out about their fear of being denied valuable NBCU programming. To satisfy concerns that Comcast would hold NBC content for its own cable service, the government arrived at a consent decree that, among other things, required Comcast to license programming to online video distributors for seven years. Additionally, Comcast agreed to not retaliate against broadcasters, studios, and cable rivals. Plus, it gave up management rights in Hulu.
Conceptually, something similar could happen to save the Microsoft-Activision deal, but as I wrote a few weeks ago when discussing the Taylor Swift–Ticketmaster mess, settlements are now out of vogue among regulators (both conservative and liberal alike). In her famous treatise, Amazon’s Antitrust Paradox, Khan points to Ticketmaster-Live Nation and Comcast/NBC as paradigmatic examples of behavioral conditions attached to vertical mergers. Last year, in a letter to Senator Elizabeth Warren, Khan expressly voiced her skepticism about the “efficacy of behavioral remedies,” adding they “have often failed to prevent the merged entity from engaging in anti-competitive tactics.”
In other words, temper any expectations of a settlement here. Instead, this fight seems like it’s going to the death, and to borrow some gaming lingo, there will be no self-revive. We’re talking permadeath as Khan shoots for a trophy that may deter future mega M&A.