On December 8, 2022, the same day the Federal Trade Commission (FTC) presented its opening arguments to a federal judge in California in an effort to stop the FTC’s acquisition of virtual reality gaming company Within, the FTC also began administrative proceedings to block Microsoft’s proposed acquisition of the video game publisher Activision Blizzard for $69 billion. With these moves, FTC Chairwoman Lina Khan continues to advance her agenda to take on Big Tech and shows that antitrust enforcers are not hesitant to take aggressive stances, even in areas where they have previously seen limited success.
Microsoft develops and publishes a number of its own popular video games, but is also a leading supplier of video game platforms and consoles, including the Xbox. The FTC complaint focuses only on the vertical aspect of the transaction. Specifically, they allege that if the gaming deal is allowed to happen, it would result in Microsoft putting Sony, Nintendo and their other platform and console competitors at a disadvantage by undercutting or otherwise denying them access to Activision’s blockbusters, including games from “Call of Duty”. ” and “Diablo” franchises.
Return to the Vertical Well
By choosing not to focus on horizontal competition between Microsoft and Activision in developing and publishing popular games, Khan’s FTC continues a recent string of actions against so-called vertical mergers. .
The first such action was taken soon after Khan’s appointment as FTC chairman in the summer of 2021, when the Commission withdrew its approval from the FTC’s and Department of Justice’s (DOJ) joint guidelines on vertical mergers. According to Khan and other Democrats on the Commission, the guidance encouraged too much deference to the inherently weak arguments often used to justify non-enforcement decisions in vertical cases. Such arguments include that the efficiencies associated with vertical integration tend to benefit consumers through lower prices or greater innovation.
In the months that followed the FTC’s withdrawal from the guidelines, Khan and her staff pursued a more aggressive approach to vertical agreements, addressing two challenges (Illumina/Grail and Lockheed/Aerojet) with mixed results. An administrative law judge rejected the FTC’s bid to block the Illumina deal in September 2022, a decision FTC staff is appealing to the full Commission. The parties to the Lockheed settlement eventually abandoned the deal weeks after the FTC initiated administrative action to block it. A third vertical transaction, a proposed merger between chip maker Nvidia and chip designer Arm, was eventually dropped by the parties two months after the FTC filed an administrative complaint.
As the agency increasingly focuses on vertical mergers, it faces some difficult precedent, particularly in trying to block AT&T’s acquisition of Time Warner in 2018. The arguments made by the DOJ in this case — the first legal challenge to a vertical transaction in 40 years — bear a striking resemblance to the FTC’s current allegations against Microsoft. In the AT&T matter, the government argued that completing the deal would give AT&T the incentive and ability to raise the price of, or even deny access to, key Time Warner television content at the expense of competitors to AT&T’s DirectTV service. The government further argued that such a foreclosure strategy would ultimately be more profitable for AT&T than simply seeking to distribute valuable Time Warner programming as widely as possible. The government’s arguments did not convince the court. The Justice Department and broader efforts to strengthen enforcement of vertical mergers have suffered what is seen as a resounding defeat.
The FTC may also encounter a number of facts in the Microsoft case that could complicate their efforts. While traditional antitrust enforcement might legitimately fear that a dominant game console or platform firm that acquires a prominent game studio and/or enters into exclusive distribution deals with them may threaten to foreclose smaller competitors (ultimately seeing them exit the market), the FTC’s complaint against Microsoft does not allege that Microsoft is even the largest participant in any of the relevant markets that the FTC alleged would be harmed by the proposed transaction. The FTC’s complaint also fails to mention that Sony and Microsoft, as well as Nintendo, have competed for years to develop vertically integrated game content for their consoles, acquiring previously independent game studios and making some of the acquired game titles exclusive in order to attract users to their respective consoles. platform.
The FTC’s complaint to stop doing business with Microsoft comes after Microsoft apparently made several attempts to assuage the concerns of enforcers and avoid a lawsuit.
In February, shortly after the deal was announced, Microsoft executives publicly pledged to loosen restrictions on developer access to Microsoft’s app stores and not promote their own games over those of competitors. Later in the year, it was announced that Microsoft was ready to enter into an agreement with the FTC through a consent decree that would govern the access to Activision’s content that it would provide to competitors on consoles and platforms. Microsoft itself even announced a 10-year deal with Nintendo to release future “Call of Duty” games on the Nintendo Switch console, making a similar offer to Sony for its PlayStation console.
Khan has previously expressed skepticism about similar remedies, arguing that commitments like this are difficult to monitor and enforce and tend not to address real competitive harm. Khan’s supporters recently cited the DOJ settlement of the 2010 merger between Ticketmaster and Live Nation as an example of how ineffective the government’s creative measures have been in keeping competition alive—in this case, the live entertainment and ticketing industries. In the absence of available structural remedies (eg divestment of business lines) that would be clear and decisive to restore competition, Khan prefers a negotiated settlement to simply block the entire transaction.
According to multiple reports, the availability of a potential settlement is at Microsoft/Activision may at one point split the Commission’s Democratic majority over whether to launch a challenge or accept a consent decree. That speculation was soon put to rest when the FTC issued its complaint — just two days after Microsoft announced its tentative “Call of Duty” deal with Nintendo.
- Expect regulators to continue to scrutinize Big Tech players. Although the FTC’s complaint cites a “continued trend toward vertical integration and consolidation” in the broader gaming industry, it’s notable that the only deals that seem to be drawing the FTC’s attention are those involving two of the biggest tech giants, Microsoft and Meta. The FTC is going to scrutinize the biggest players very hard so they don’t get bigger.
- Potential impact on industry. If successful, the FTC’s challenge could have lasting implications for the gaming industry as a whole. Critics of the agency’s action will point out that over more than 40 years of the industry’s development, vertical integration and platform exclusivity have tended to emerge as a direct result of strong competition, not its absence, as platform companies compete for a more attractive offering. for consumers. In this sense, government skepticism about the appropriateness of these types of arrangements has at least some potential to slow the activities that have long driven industrial investment and innovation.
- The FTC and DOJ will continue to aggressively expand their mandates. Khan was undeterred by the mixed results and historical failures of most previous vertical merger attempts. These moves, along with public statements made by both Khan and DOJ Antitrust Division Chief Jonathan Kanter, signal a significant shift in federal antitrust enforcement priorities compared to recent decades. Law enforcement acknowledges that there is a lack of case law supporting challenges to vertical mergers, but they seem settled that the only way to change that is to bring more cases to court.
- New instructions are coming. Khan and Kanter are currently overseeing the development of new merger guidelines to be adopted by the FTC and DOJ. These new guidelines are expected to largely (1) embody the agencies’ aggressive new approach to analyzing vertical transactions and (2) provide color for how and when the agencies will consider adopting different types of remedies through the consent decree process. The new guidelines are expected to be published in early 2023.
- Plan your procedure. Merger review and litigation alone can be a weapon, and Khan seems unafraid to wield it. The regulatory burden on deals that may be of interest to the FTC can be so great that it causes the merging parties to exit their deals entirely before any court proceedings. Just consider the timelines. For example, Microsoft announced its acquisition of Activision in January 2022, and almost a year later, the FTC began its administrative process. Finalization, along with the appeal, could take more than another year and impose millions of dollars in costs on the joining parties. In other words, while law enforcement may have an uphill battle in terms of legal precedent, their desired goals may be met simply through the increased cost of joining the parties in terms of time, burden, and expense. Mergers of parties whose deals could raise antitrust concerns should plan accordingly.
- Agencies remain skeptical of negotiated agreements. The FTC finalized its decision to bring its case against Microsoft at a time when Microsoft was reportedly prepared to make significant remedial concessions. The agency instead chose to litigate the case in limbo rather than obtain a quick “win” in the form of a consent decree. This serves as a reminder to parties negotiating merger agreements that litigation commitments can be as important as transfer and other remedy commitments in addressing antitrust risk.
Susan Lee contributed to this alert.