It has been about two decades since Microsoft and the US government went head-to-head in one of the country’s biggest-ever antitrust battles. In the years since, Microsoft has managed to mostly stay off the radars of lawmakers and antitrust regulators, even as scrutiny of other tech giants has ramped up.
But with its plan to acquire popular video game developer Activision Blizzard (ATVI) for nearly $70 billion, Microsoft (MSFT) may be thrust firmly back into the antitrust spotlight. The blockbuster deal would secure Microsoft (MSFT)’s spot among the most dominant global players in gaming alongside Sony and Tencent, and it would expand the tech company’s first-party content library to include some of the most popular titles in gaming, including “World of Warcraft” and “Call of Duty.”
Industry watchers say it’s a risky time for Microsoft to try to push through what would be the largest acquisition in its history. The head of the nation’s antitrust enforcement agency, Federal Trade Commission Chair Lina Khan, has pledged to crack down on companies consolidating power and reducing competition in a range of industries, especially technology. Activision Blizzard’s stock is currently trading nearly 15% below the acquisition share price, a possible sign of investor skepticism about the deal going through.
Still, Microsoft isn’t the only one who faces a risk if the FTC does decide to challenge the deal. It could also present some uncomfortable challenges for Khan and the agency by highlighting limitations in their ability to tackle a new era of potential antitrust issues raised by the tech industry.
In her first six months leading the FTC, Khan laid out an ambitious agenda that involves pushing sweeping reforms to the practice of antitrust law and being more proactive about blocking potentially anticompetitive mergers before they’re completed. Her plans have been bolstered by support from the White House and bipartisan agreement among lawmakers about the need to rein in massive tech firms.
Challenging the Microsoft-Activision deal could be a chance for Khan to prove she’s serious about taking action. However, there remain serious legal hurdles to the FTC actually winning such a lawsuit (should it decide to bring one) — namely that the law itself is slow to change, and the existing rules and practice may not be enough to block even such a large acquisition.
Both antitrust experts and the FTC itself have also noted that the agency is short on resources, especially compared to large tech companies. And it’s unclear whether Khan will want to spend those limited resources on Microsoft and the gaming industry — or, for that matter, to make it one of her first new antitrust fights against Big Tech — rather than focus on some of the other ways tech companies have potentially consolidated markets. For example, Khan’s FTC is moving forward with a Trump-era suit to unwind Facebook’s years-old acquisitions of Instagram and WhatsApp, and it is also reportedly engaged in an extended review of Amazon’s acquisition of movie studio MGM.
It’s still early in the process. Microsoft filed formal paperwork with the FTC to kickstart the merger review process and delivered an initial briefing to FTC staff earlier this month. The agency’s review process could take months. But antitrust experts say Microsoft’s nearly $70 billion bid for Activision will be hard for the FTC to ignore.
A deal of this size “is almost a challenge to Lina Khan to kind of bring it on,” Hal Singer, managing director at economics research firm Econ One and a professor at Georgetown Business School, told CNN Business. “She’s trying to push back and slow down the train, and this is basically the tech sector just saying, ‘You can’t stop us.’”
The FTC typically does not discuss deals under review and did not respond to a request for comment on this story. Microsoft pointed CNN Business to comments from President Brad Smith — who was the company’s general counsel during its last antitrust battle — in a recent briefing with reporters, where he said it “is so early in the process that we’re not yet at a point where we’re getting any real feedback [from the FTC]. We wouldn’t expect to yet.”
Microsoft CEO Satya Nadella also commented on the deal during the briefing, saying: “We want to compete … I want us to approach this in a principled way where we are building our platforms, our technology, such that we are on the right side of history.”
Evaluating the Microsoft deal
At the heart of regulators’ evaluation of any merger is the question of how much the deal could reduce competition, and therefore threaten to raise prices for consumers or cause other harms.
There are a few ways to approach this: Because Microsoft, like Activision Blizzard, designs some of its own games, it’s possible that the deal could be considered a “horizontal merger,” the term for when one company is acquired by a direct competitor, effectively consolidating the market. But because there’s significant competition in the game development space, regulators are less likely to be concerned about this aspect of the deal, antitrust experts say.
If the FTC does decide to challenge the deal, it will likely instead be on the grounds that it is an anticompetitive “vertical merger.” A vertical merger is one in which one company (think, Microsoft, which creates gaming platforms and consoles) acquires another company in the same industry but a different part of the supply chain (like Activision Blizzard, which makes the games to play on those platforms).
That’s where things could start to get tricky for the FTC. It can be harder to prove potential harms from a vertical merger than from a horizontal merger because the economics are more complex, according to Daniel Crane, a law professor and antitrust expert at the University of Michigan. In a horizontal merger, two competitors become one competitor, making it more apparent how overall competition in the market is reduced. But in a vertical merger, the end result is less straightforward. (There have also been fewer challenges to vertical mergers over the past few decades, which would mean less legal precedent to rely on in court.)
In a vertical merger case against Microsoft, regulators would look at whether the deal could result in the denial of a crucial product to competitors that would impede their ability to compete effectively. In this case, that would likely mean looking at whether Microsoft could make existing or future games developed by Activision Blizzard exclusive to its platform, to the detriment of rivals like Sony.
In theory, that proposition is part of what makes the deal attractive. Microsoft has been trying to drive a growing slate of content into its Game Pass subscription offering to attract new users and keep existing ones paying for the membership, said Forrester analyst Will McKeon-Wright. (Microsoft has suggested it won’t make Activision content exclusive to its own platforms, although the company could still profit from licensing deals with competitors’ platforms.)
Much of the antitrust argument could come down to how you define the market. Regulators would likely want to focus on a smaller market — game consoles, for example — where it could contend that Microsoft is a dominating force. The company, meanwhile, would likely argue that it competes for consumers’ attention with a broader collection of companies, such as Netflix and TikTok.
“There might be something in the Activision portfolio, that by denying it to a rival gaming platform, Microsoft could cripple that rival platform,” Singer said. If there is, regulators may reasonably be able to make the case that consumers could expect higher prices from the deal.
Still, “the chances for the government, under the current state of the law, are very low for stopping a vertical merger,” Singer said. The failed challenge to the AT&T-Time Warner merger in 2018 is one of the only recent examples of litigation over a vertical merger. (Time Warner, which later rebranded as WarnerMedia, is CNN’s parent company.)
“If I’m Microsoft and I’m looking at this kind of a deal, I think I’m expecting pushback from the FTC and possibly litigation,” Crane said. “But I’m also feeling pretty good about my chances.”
The challenge for the FTC
That’s where Khan’s plans to overhaul the country’s approach to antitrust come into play. For the past several decades, antitrust regulators have focused chiefly on the potential for mergers to raise prices for consumers. Now, Khan, who has been concerned about vertical mergers since before starting at the FTC, is proposing a broader framework for how to think about the possible harms from mergers and corporate consolidation, such as the impact on workers in the affected industry.
To that end, the FTC in September withdrew guidelines for evaluating vertical mergers that the agency released during the Trump administration, and is now working with the Justice Department’s Antitrust Division to review whether to release updated guidelines that reflect technological and economic changes in recent years. That update could include giving regulators more leeway to consider whether a merger might “tend to create a monopoly,” even in its early stages, the agencies said.
The review is being made, at least in part, with an eye toward better regulating the tech companies, who have defended mergers and their growing power by pointing to the many free products and services they provide to consumers.
While the guidelines are not legally binding, the fact that there currently are none for a court to refer to may mean that the FTC is not yet ready to come out swinging with a challenge to the Microsoft-Activision deal. “You want that thing in your hand when you go in to challenge this deal, you really don’t want to go in without it,” Singer said of the FTC.
But it’s unlikely that those revised guidelines, the public comment period for which began last month, will be ready in time for a potential case against the Microsoft deal. Even if the new guidelines were released during litigation, “you know what Microsoft’s going to say, they’re going to say, ‘they wrote these guidelines with us in mind,’” Crane said. (The FTC could wait to take action, as it has shown that it’s willing to revisit mergers even years after the fact with its lawsuit seeking to break up Facebook, but Khan has indicated a desire to challenge potentially anticompetitive deals before they go through.)
In the end, the acquisition could end up closing with a consent decree, a settlement where the acquiring company agrees to make some concessions to complete the deal, as many other vertical mergers have in recent decades. Microsoft has already hinted at its willingness to negotiate and play nice with competitors to help ensure the deal goes through. Shortly after the deal was announced, Microsoft’s head of Xbox, Phil Spencer, tweeted that he had spoken with leaders at Sony.
“I confirmed our intent to honor all existing agreements upon acquisition of Activision Blizzard and our desire to keep Call of Duty on PlayStation,” Spencer said. “Sony is an important part of our industry, and we value our relationship.”
And last week, the company made a more detailed appeal to regulators to bless the deal. It promised to ensure that the popular franchises it acquires from Activision Blizzard will remain available on PlayStation under Activision’s existing deal with Sony. The company also said it has offered to extend the deal on a “multiyear basis.” Activision’s existing deal with Sony runs until 2024.
“I would be very surprised if Microsoft wasn’t willing to make a number of concessions to get this deal done. The question is whether that would be acceptable,” Crane said. “[The FTC] want to be seen as active and doing things and really changing the status quo in antitrust.”