If Microsoft thought it had found a way to appease Washington and insulate itself from the regulatory backlash hitting Big Tech, it has just had a rude awakening.
Thursday’s legal challenge by the Federal Trade Commission to software company’s $75 billion purchase of games company Activision Blizzard marks the first direct regulatory threat against the U.S. software giant in more than two decades. As competition authorities in the UK and EU step up their own investigations, he has threatened to trigger a series of actions that could unravel the gambling industry’s biggest deal.
The FTC’s intervention, led by Chairwoman Lina Khan, is also one of the first clear signs that regulators will try to stop America’s biggest tech companies from expanding the reach of their empires through online communications. acquisitions – even when the deals appear to pass muster in most traditional antitrust analyses.
“This is the most significant merger challenge the Biden administration’s antitrust agencies have issued to date,” said former FTC Chairman William Kovacic. This is the “historic battle” that will define “the administration’s commitment to a tougher approach to merger control and Big Tech in particular,” he added.
The action threatens a cautious attempt by Microsoft to distance itself from past antitrust battles that have been brewing for years. Brad Smith, the company’s top lawyer and longtime chairman, has become a fixture in Washington and Brussels as the company has sought to draw a clear contrast between its own business practices and its Big Tech rivals.
In announcing the deal earlier this year, Microsoft tried to position itself as a more “open” rival to what it saw as the restrictive smartphone worlds of Google and Apple, aligning itself with the proposed legislation in Washington that would force rivals to open their mobile app stores.
He also sought to cast himself as a smaller challenger to gaming giant Sony, maker of what he called the “dominant” PlayStation, and Tencent’s huge mobile games business in China.
The depth of Microsoft’s failure was evident in the hardening international regulatory consensus that formed against the deal with Activision. The FTC’s arguments echoed those of the UK Competition and Markets Authority, which recently opened a second stage investigation.
The main complaint from regulators is the risk of Microsoft making Activision’s games exclusive to its Xbox, hitting rival console makers. Much of the attention has been focused on Call of Dutya game that has brought in more than $30 billion in revenue over 19 years.
Smith wrote in a Wall Street Journal commentary earlier this week that it would be “economically irrational” for Microsoft to pull Activision’s games from rival consoles. In addition to cutting off a revenue stream, he said, it would prevent “cross-play” which allows players using different hardware to join multiplayer games, which would make Call of Duty less appealing to all players.
The FTC has pushed back against arguments like this before. US chipmaker Nvidia made a similar case when trying to buy Arm, the SoftBank-owned chip design company, two years ago, saying its economic interest was to continue making Arm designs free. accessible to others. He abandoned the acquisition when regulators on both sides of the Atlantic refused to accept his assurances.
To bolster its case, Microsoft watered down the terms of an earlier offer by saying it would Call of Duty available for up to 10 years on rival consoles. Nintendo accepted the offer earlier this week, giving Microsoft a boost before the FTC came to a head. But Sony refused to budge.
In a partially redacted legal complaint released late Thursday, the FTC said Microsoft has made and has not acted on similar assurances before. When buying games company ZeniMax last year, he said, Microsoft told the EU it would have no incentive to remove the company’s games from competing consoles, for reverse the trend once the agreement is concluded.
In another echo of UK regulators’ reservations about the deal, the FTC said it would give Microsoft an unfair advantage in the new games subscription market. That could prove to be a stronger piece of the regulators’ case than arguments over exclusivity, said Joost Rietveld, an associate professor at University College London who specializes in platforms and games. “It puts them in a dominant position in this segment,” he said.
Like the UK’s CMA, US regulators have also said owning Activision’s games could help Microsoft dominate the nascent cloud gaming market, giving it the chance to lead a new streaming market in much the same way as Netflix did it for video. However, cloud gaming is only a tiny part of the industry, which weakens that part of the case, according to Rietveld.
The FTC’s expansionary approach will face serious tests. His lawsuit against Microsoft came the same day a US court heard the agency’s injunction against another deal, Meta’s purchase of VR app company Within.
If the court rejects the FTC’s argument in this case, “it would be another indication that the agencies are being overly aggressive in their efforts, far more than established antitrust case law,” said a senior mergers and acquisitions attorney.
But the lawsuit filed Thursday could also serve as a starting point for broader international action against the Activision deal. The FTC’s action “could have the effect of encouraging other authorities” investigating the deal in London and Brussels, Kovacic said, and neutralizing the risk that any action they take against Microsoft would be considered a “protectionist blow against American companies”.
The agency’s case is not expected to be heard until August. Well before that, at the end of April at the latest, the British authorities must deliver their verdict. For Microsoft to push to become a much bigger force in the gaming world, the dark clouds are starting to gather.
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