Court Rejects FTC Challenge to Microsoft Acquisition of Activision: A Setback to U.S. Antitrust Enforcement

A decision out of the Norther District of California concerning the acquisition of one video game giant by another has yielded yet another setback to antitrust enforcement by the Federal Trade Commission (FTC) in the United States.

Microsoft Corp. (“Microsoft”) and Activision Blizzard Inc. (“Activision”) announced Microsoft’s $ 68.7 billion purchase of Activision in January 2022, stating that they expected to close the deal during the 2023 fiscal year.

The vertical integration would combine two powerhouses in the video game industry. Microsoft has manufactured the Xbox line of home video game consoles since 2001, with each generation selling tens of millions of units. Along with Sony—manufacturer of the PlayStation line of home video consoles—Microsoft controls the market of high-performance consoles. Activision – on the other hand – controls a number of incredibly popular games. The Call of Duty video game series, for example, has sold over 400 million copies, holds the Guinness World Record for the best-selling first-person shooter video game, and is the fourth best-selling video game franchise ever. Activision also publishes World of Warcraft, a massively multiplayer online role-playing game (“MMORPG”), which was released in 2004 and has grossed over $9 billion in revenue.

The Microsoft/Activision deal faced global scrutiny. The U.K.’s Competition and Markets Authority ("CMA") announced that it referred the purchase for an in-depth investigation in September. The EU announced its own investigation in November. In December 2022, the FTC filed a complaint seeking to stop Microsoft from acquiring Activision following a nearly year-long investigation.

In its complaint, the FTC alleged that the merger would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the FTC Act, 15 U.S.C. § 45.[1] Specifically, the complaint alleged that:

With control of Activision’s content, Microsoft would have the ability and increased incentive to withhold or degrade Activision’s content in ways that substantially lessen competition—including competition on product quality, price, and innovation. This loss of competition would likely result in significant harm to consumers in multiple markets at a pivotal time for the industry.[2]

The FTC further alleged that the acquisition could allow Microsoft to wield a monopoly in multiple markets or substantially lessen competition in those markets because Microsoft would have both the ability and incentive to disadvantage competitors.[3]

Because the FTC trial was set for August 2023 – a date after the July 18, 2023, closing deadline set by Microsoft and Activision in their merger agreement – the FTC filed a complaint on June 12, 2023 for a temporary restraining order (TRO) and preliminary injunction with the Northern District of California, asking the court to prevent Microsoft and Activision from moving forward while the administrative proceedings were pending.[4]

Less than a month later, on July 11, 2023, U.S. District Judge Jacqueline Scott Corley denied the FTC’s motion, finding, “the FTC has not shown it is likely to succeed on its assertion the combined firm will probably pull Call of Duty from Sony PlayStation, or that its ownership of Activision content will substantially lessen competition in the video game library subscription and cloud gaming markets.”[5]

Judge Corley rejected the FTC’s argument that, in order to establish the anticompetitive effects of a vertical merger, it needed to show that the transaction was “likely to increase the ability and/or incentive of the merged firm to foreclose rivals.”[6] To support this argument, the FTC had cited its own March 2023 decision, which stated that “[t]o harm competition, a merger need only create or augment either the combined firm’s ability or its incentive to harm competition. It need not due both.”[7] The court rejected this reasoning, writing:

If there is no incentive to foreclose, then there is no probability of foreclosure and the alleged concomitant anticompetitive effect. Likewise, if there is no ability, then a party’s incentive to foreclose is irrelevant….Thus, to establish a likelihood of success 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.[8]

The court found that the FTC had not demonstrated a likelihood of ultimate success because, although the combined firm would undoubtedly have the ability to limit Call of Duty exclusively to Xbox, the FTC had not shown that the firm would have an incentive to foreclose Call of Duty from Sony. In finding the lack of incentive and therefore lack of probability for foreclosure, the court cited Microsoft’s stated commitment to maintain the availability of Call of Duty for use with other consoles and the lack of contrary internal documents, Microsoft witnesses testimony that there were no plans to make Call of Duty an Xbox exclusive title, the reliance of the Activision purchase price on PlayStation sales and mobile content, Microsoft’s anticipated irreparable reputational harm if it were to foreclose Call of Duty from Sony, and the lack of instances identified by the FTC where a game comparable to Call of Duty was made a console exclusive.

Following this denial, the FTC sought a stay pending its appeal to the Ninth Circuit, which was denied by Judge Corley on July 13.[9] The next day, the Ninth Circuit followed suit and issued a one-page order denying the FTC’s emergency motion for injunctive relief.[10]

Following the Ninth Circuit’s denial, Microsoft and Activision moved to withdraw the FTC’s administrative proceeding from adjudication, noting that Microsoft had signed a 10-year agreement with Sony to keep Call of Duty on PlayStation.[11] The FTC granted the request.[12] In the interim, Microsoft announced that it was extending the merger agreement deadline to October 18 “to work though the final regulatory issues.”[13]

Days later, FTC Chair Lina M. Khan spoke about the loss, noting that “There’s no question that vertical mergers can be tougher to litigate.”[14] The ruling out of the Northern District of California has undoubtedly made this type of litigation even more difficult.

But Microsoft’s acquisition of Activision itself is not yet certain.[15] Although the Ninth Circuit rejected the FTC’s motion for injunctive relief, the FTC can continue with its appeal. The FTC can also refile its in-house complaint. The extended deadline means there is more time for these actions to take place and there are ongoing negotiations in the U.K. where the CMA has imposed a block on the merger. Antitrust authorities in the U.S. or the U.K. may still be able to prevent the acquisition or significantly change what it ultimately looks like. Stay tuned.

[1] Complaint at 1, In the Matter of Microsoft Corp., and Activision Blizzard, Inc., No. 9412, 2022 WL 17975333 (F.T.C. Dec. 8, 2022).

[2] Id. at 2.

[3] Id. at 3.

[4] Complaint, FTC v. Microsoft Corp., No. 3:23-cv-02880-SK (N.D. Cal. June 12, 2023).

[5] FTC v. Microsoft Corp., No. 23-cv-02880-JSC, 2023 WL 4443412 at *1 (N.D. Cal. July 10, 2023).

[6] Id. at *12.

[7] In the Matter of Illumina, Inc. and Grail, Inc., No. 9401, 2023 WL 2823393, at *38 (F.T.C. March 31, 2023).

[8] FTC v. Microsoft Corp., 2023 WL 4443412 at *12–13.

[9] FTC v. Microsoft Corp., No. 23-cv-02880-JSC (N.D. Cal. July 13, 2023).

[10] FTC v. Microsoft Corp., No. 23-15992 (9th Cir. July 14, 2023).

[11] Brief of Respondents, In the Matter of Microsoft Corp. and Activision Blizzard, Inc., No. 9412 (F.T.C. July 18, 2023).

[12] In the Matter of Microsoft Corp. and Activision Blizzard, Inc., No. 9412 (F.T.C. July 20, 2023).

[13] https://twitter.com/BradSmi/status/1681647628554211330

[14] https://www.law360.com/articles/1703258/-losing-two-is-ok-ftc-s-khan-says

[15] https://www.law360.com/competition/articles/1705238?nl_pk=089077ed-cd3b-4d00-8370-5164e74ed68d&read_main=1&nlsidx=0&nlaidx=0t