FTC 'Disappointed' With Court's Microsoft/Activision Injunction Denial, Ponders 'Next Step'

The FTC hasn’t shown it’s likely to succeed on its assertion that Microsoft/Activision “will probably pull” Call of Duty from the Sony PlayStation, said Corley's heavily redacted opinion. The FTC also failed to show its ownership of Activision content “will substantially lessen competition in the video game library subscription and cloud gaming markets,” it said.

The FTC is "disappointed in this outcome given the clear threat this merger poses to open competition in cloud gaming, subscription services, and consoles,” emailed an agency spokesperson Tuesday. "In the coming days we'll be announcing our next step to continue our fight to preserve competition and protect consumers.”

But Microsoft is "grateful" to Corley's court "for this quick and thorough decision," said Vice Chair-President Brad Smith in a statement. Microsoft hopes "other jurisdictions will continue working towards a timely resolution” of their merger reviews, said Smith. Microsoft is “committed to working creatively and collaboratively to address regulatory concerns,” he said.

The FTC initiated an administrative action in December to block Microsoft’s proposed Activision buy, centering on the Call of Duty first-person shooter video game and a concern the combined firm would foreclose the flagship title from rivals “for its own economic benefit to consumers’ detriment,” said the opinion. Four weeks ago, the FTC filed a motion for preliminary injunction and a temporary restraining order to enjoin the merger pending completion of the administrative action (see 2306120074).

Microsoft/Activision's July 18 termination date resulted in expedited proceedings, including five days of an evidentiary hearing that Corley packed into the final two weeks of June (see 2306150001). In the end, the judge found unpersuasive the FTC's arguments that Microsoft would partially or fully foreclose the availability of Call of Duty on competitive platforms. The Call of Duty franchise has been available on PlayStation and Xbox consoles since 2003. Free-to-play versions are available on both consoles and on Windows PCs, plus iOS and Android mobile devices.

The FTC “appears to contend" it needs only to show the combined firm would have a greater ability and incentive to foreclose Call of Duty from its rivals "than an independent Activision,” said the opinion. But it’s not enough to say an acquisition might lessen competition, it said. The FTC must show the merger “will probably substantially lessen competition,” it said. To succeed on its ability and incentive foreclosure theory, the FTC “must show the combined firm (1) has the ability to withhold Call of Duty, (2) has the incentive to withhold Call of Duty from its rivals, and (3) competition would probably be substantially lessened as a result of the withholding,” it said.

Microsoft announced the agreement to buy Activision for $68.7 billion in January 2022. A stipulation of the agreement is that either party may terminate it if the transaction doesn't close by July 18, 2023. If the deal is terminated because it hasn’t closed, Microsoft may have to pay Activision a $3 billion termination fee. The FTC filed its action June 12 to preliminarily enjoin the purchase. That was less than six weeks before the termination date, said Corley's opinion.

The court related the FTC action to a pending private antitrust action -- Demartini v. Microsoft -- seeking to stop the acquisition. The FTC filed an emergency motion for a temporary restraining order (TRO) with its complaint. It argued Microsoft planned to proceed with the deal by June 16 and wouldn't stipulate to a TRO unless the FTC filed in the U.S. District Court for the District of Columbia rather than the Northern District of California where the commission planned to file because that court was already overseeing Demartini. The court granted the FTC’s motion for a TRO and set an evidentiary hearing that ended June 29.

Microsoft reported the planned buy to the FTC under the Hart-Scott-Rodino Act in February 2022, beginning an 11-month investigation in which the two companies produced nearly 3 million documents and sat for 15 investigational hearings. The waiting period on the HSR Act, preventing parties from closing the transaction, was extended by agreement until Nov. 21; the parties agreed voluntarily to delay closing until Dec. 12.

On Dec. 8, the FTC filed an administrative complaint alleging the deal violated Section 7 of the Clayton Act. During fact discovery of the administrative proceeding, which closed on April 7, the companies produced nearly a million documents and 30 depositions, followed by expert discovery. An evidentiary hearing before an FTC administrative law judge is to begin Aug. 2.

Microsoft's proposed Activision buy is “the largest in tech history,” meaning it “deserves scrutiny,” said Corley's opinion. “That scrutiny has paid off,” she said, noting Microsoft committed “in writing, in public and in court” to keep Call of Duty on PlayStation for 10 years on parity with Xbox. Microsoft also committed to bringing Call of Duty to the Nintendo Switch. It also signed agreements to bring Call of Duty to several cloud gaming services.

The court’s responsibility is to decide if the merger should be halted or even terminated, pending resolution of the FTC administrative action, said Corley's opinion. The court said the FTC "has not shown a likelihood it will prevail” on its claim the purchase “in this specific industry may substantially lessen competition. ... To the contrary, the record evidence points to more consumer access to Call of Duty and other Activision content.”

Charlotte Slaiman, competition policy director at Public Knowledge, called the ruling a "a disappointing loss for consumers." The FTC "may still prevail," she said, but "consumers are less likely today to enjoy the benefits of a competitive video game industry than they were yesterday." Slaiman said she's "especially disappointed" by "how weak antitrust law is today in stopping vertical mergers." The law needs to take the "anti-competitive harms of vertical mergers more seriously," she said. PK hopes the decision spurs Congress "to redouble its efforts to strengthen antitrust law,” she said.

Video games market analyst Michael Pachter of Wedbush Securities said in a Tuesday note to investors that Activision shareholders will be paid $95 per share in the transaction and the FTC may seek to force a divestiture of the Call of Duty assets. “While we think that the FTC is highly unlikely to prevail, we expect it to continue its bluster in order to force concessions from Microsoft," he said. Possible concessions might include agency-induced price maintenance policies for games, consoles and the online Game Pass service, said the analyst.