Granting FTC's Microsoft/Activision Injunction Would Be ‘Deal-Killing,’ Says Microsoft

As U.S. District Judge Jacqueline Scott Corley for Northern California in San Francisco wrapped up a five-day evidentiary hearing Thursday on the FTC’s motion for an injunction to block Microsoft’s Activision Blizzard buy, Microsoft answered the commission’s June 12 complaint (see 2306120074) by asserting the agency was wading into unprecedented waters.

The FTC asks the court “to do something that has never been done before” when it seeks to enjoin a vertical merger under Section 13(b) of the FTC Act, said Microsoft’s answer (docket 3:23-cv-02880). The relief the FTC seeks not only lacks precedent but also is “deal-killing,” it said. “To our knowledge, no unconsummated merger has ever survived a Section 13(b) injunction long enough for the FTC to complete its in-house administrative adjudication -- in which the FTC nearly always rules for itself -- and then obtain relief from a neutral Article III court,” it said.

Corley’s ruling on the motion for injunctive relief will decide for Microsoft “whether the deal moves forward,” said lead Microsoft attorney Beth Wilkinson of Wilkinson Stekloff in June 22 opening statements of the evidentiary hearing (see 2306220070). If the deal doesn’t close by the July 18 termination date, and Corley enjoins the transaction, “to go through the three-year administrative nightmare, no one can withstand that, and we certainly can’t,” she said.

The FTC’s case is “entirely without merit,” said Microsoft’s answer. Rather than inhibit competition, as the commission claims, the merger “will make Microsoft a more effective competitor to more successful and established firms in console, PC, and mobile gaming,” it said. It also will expand access of Activision content to platforms that don’t have it and likely wouldn’t get it without the merger, it said. The transaction also will “drive investment to new technology and content,” it said.

The case involves the vertical merger between Xbox, the third-place gaming console behind Sony and Nintendo, and Activision, “one of dozens of publishers of popular video games,” said Microsoft’s answer. “For this deal to be profitable, Microsoft will need to make Activision’s portfolio of gaming titles as widely available as possible,” including by continuing to sell its most popular console game, Call of Duty, on the Sony PlayStation, it said.

“Brushing aside” the facts, the law and the economics, the FTC seeks to block the deal “based on a tenuous theory that Microsoft will withhold Call of Duty from competitors,” said Microsoft’s answer. “Doing so would be economically irrational for Microsoft, but regardless, Microsoft cannot do so,” it said.

After agreeing to buy Activision, Microsoft signed a 10-year agreement to bring Call of Duty to Nintendo, which hasn’t had that game on its consoles for more than a decade, said its answer. It also agreed to bring Call of Duty to five leading cloud gaming services, also for a 10-year term, “something Activision has consistently refused to do,” it said. It has made the same offer to Sony, “but Sony has refused” to accept it, it said. Microsoft nonetheless committed to the public, its shareholders and now the court “that it will continue to sell Call of Duty on PlayStation if Sony permits it to do so,” it said.

Even if Microsoft had “the incentive and the ability” to withhold Call of Duty from PlayStation, doing so wouldn’t constitute a substantial lessening of competition under antitrust law, said Microsoft’s answer. The acquisition of a single game by the third-place console manufacturer can’t “upend this highly competitive market,” it said. Exclusive titles “are common in the gaming industry,” it said. Until “relatively recently,” most games were available only on a single platform, it said: “To this day, Sony and Nintendo both have vastly larger libraries of exclusive content than Xbox.”

The FTC’s theory of harm to the “putative markets” for subscription library and cloud gaming services is “even weaker” than it is for consoles, said Microsoft’s answer. Activision content isn’t currently available for either market, and Activision as a standalone company has no intention to make it available “for an array of technological and financial reasons,” it said.

Microsoft, by contrast, “committed to bringing Activision content to its own subscription library and to third-party cloud gaming platforms,” said its answer: “Thus, the undisputed evidence will show that, across every putative market identified by the FTC, the result of the merger will be more competition and broader access to Activision content.”