First anniversary of Microsoft’s acquisition of Activision Blizzard: gamers’ material benefits vs. FTC’s imaginary harm

The anniversary and the FTC’s persistence warrant a quick look at whether anything that has occurred since the closing of the deal has a bearing on the FTC’s case. The short answer is that

• various good things have happened that disprove the original theories of harm, and
• to the extent that any developments were unwelcome, they can’t be attributed to the merger because they are simply in line with industry-wide (or even macroeconomic) trends.

This article

1. discusses, briefly, each of the areas of concern,
2. explains the procedural situation, and finally
3. speculates about what the FTC’s broader agenda may be.

1. What happened vs. what the FTC thought would happen

1.1 Console market: more games on PlayStation (and Nintendo)

In December 2022, the FTC brought an administrative complaint to start a proceeding before its own judge, with the primary concern being that Microsoft would use ABK’s Call of Duty action shooter game (“CoD”) to unseat videogame console market leader Sony. For procedural reasons, the agency is still bound to the scope of that original complaint, while other regulators set different priorities in 2023. But the FTC’s complaint was the result of investigating the then-proposed transaction for almost a year.

Microsoft reached a philosophical agreement with Nintendo in late 2022 and formalized it in early 2023: CoD is going to come to that platform. Microsoft also made offers to PlayStation maker Sony early on, but only when it became clear that the deal was going to happen anyway did Sony finally sign a ten-year contract.

After the closing of the deal, even further commitments to multi-platform gaming were made (beyond COD or any other traditionally multi-platform ABK content). In February 2024, Microsoft announced that four popular and previously Xbox-exclusive games would come to Sony’s and Nintendo’s platforms this year: Pentiment, Hi-Fi RUSH, Grounded and Sea of Thieves (February 21, 2024 Xbox announcement).

If gamers criticize Microsoft for anything it has done with ABK’s content since the merger, it’s actually Xbox fans wanting more exclusivity for their preferred platform. Those particular gamers argue that if Sony and Nintendo keep certain exclusives while Microsoft makes content available everywhere, the net effect is going to be that gamers have no more reason to buy an Xbox, and that could reduce choice in the console market. This is a different kind of discussion, but it is telling that the only controversy surrounding Microsoft and game availability in 2024 is about too little exclusivity. They even had to organize a podcast to calm down the outrage (February 12, 2024 X post by Xbox).

Unsurprisingly to maybe everyone but the FTC, there has been no major shift of market share in favor of Xbox. It’s still only number three in the market. Meanwhile, CoD remains wildly popular on PlayStation.

1.2 Subscription services: gamers get more value, and Microsoft’s rivals aren’t harmed

The FTC also had concerns over multi-game subscription services. Simply put, they feared that Microsoft might own the Netflix-like future of how gamers pay for content.

Like in consoles, there has been no indication of others losing ground as a result of Microsoft’s acquisition of ABK.

In March 2024, Diablo IV came to Game Pass (for the Xbox and for PCs) (YouTube video). Many millions of additional gamers have had the chance to play it without having to make a one-time purchase of the game or paying any other separate fee.

1.3 Cloud gaming: more games for GeForce Now (Nvidia) and Boosteroid, and the only potential threat of cloud content aggregation comes from Tencent

For the CMA. cloud gaming was the only theory of harm over which it originally blocked the deal, and the European Commission (EC) emphasized it. The FTC had thrown in a cloud gaming theory of harm in December 2022 that was little more than an afterthought, and tried to get mileage out of it later.

Like in the console business, Microsoft actually entered into agreements with competitors to address any potential concerns. By now more than a dozen Microsoft games have launched on each of GeForce NOW and Boosteroid.

The basis on which the CMA ultimately cleared the transaction involved three-way arrangements with French game maker Ubisoft. The idea was that there should still be an independent center of decision-making, in the form of Ubisoft, with an interest to maximize the returns from ABK’s cloud gaming rights as opposed to having an agenda to favor any particular cloud gaming platform. It is too serious to be ironic, but Ubisoft has recently acknowledged rumors of discussions with Chinese online services and gaming giant Tencent (October 7, 2024 Eurogamer article). If there is any transaction that competition authorities concerned about too much content power under the control (or at least material influence) of one company should look at, it’s that one. By contrast, Microsoft’s purchase of ABK has strengthened some of its competitors.

1.4 Price increases

The FTC has recently asserted that certain subscription pricing changes by Microsoft supported its theories of harm (July 20, 2024 games fray article). They made it sound like Microsoft now had so much market power it could increase prices with impunity.

Latetly there have been price increases even where no major content was added. Sony raised prices of its subscription offerings “across all tiers” by roughly 30% according to IGN.

If only one company in a given field can raise prices while the others cannot, it may indeed have enormous market power. Not so in this case. And let’s not forget that inflation affects everything sooner or later, even games.

1.5 Labor market

If ABK had remained independent, there would have been job cuts (February 8, 2024 games fray article). There have been some since the merger, and that is part of a regrettable, industry-wide phenomenon summed up by the headline of a recent Wall Street Journal article:

Making Videogames Was a Dream Career. Then the Mass Layoffs Came.

Sony, Ubisoft, Take-Two Interactive, Electronic Arts, Epic Games and others have laid off large numbers of workers. Not only Microsoft-ABK.

Microsoft is actually the first Big Tech company to have promised to remain neutral in union campaigns for U.S.-based employees. Since the closing of the merger, that neutrality agreement has also benefited employees at Activision, Blizzard and Zenimax who are/were considering joining a union.

2. Procedural Outlook

The United States Court of Appeal for the Ninth Circuit heard the FTC’s appeal of the PI denial on December 6, 2023. It’s been more than ten months, and still no decision. There is no statutory time limit, but psychologically it’s difficult to imagine that a decision further to a 2023 appeal would come down any later than in 2024.

The normal timeline is in the 3-6 month range, and that doesn’t even apply to PI cases, which are typically fast-tracked. But this PI appeal is only about water under the bridge: you can’t prevent something (through an injunction) that has already happened. Injunctions are there to prevent something from happening in the first place, or to bar someone from repeating an unlawful act. This merger was closed a year ago, so even if the appeals court found that the FTC should have obtained a PI, or that the district court made some mistake (which could even be one that doesn’t change the outcome), it’s all academic. The deal is done.

The hurdle for the merger to be undone is sky-high. To undo the merger means Microsoft would have to sell parts or all of ABK to another buyer or, more likely, spin it off by taking a separate entity public and selling its shares. Further down the road, the FTC could order such a divestiture, but an appeals court would actually decide.

Whatever the Ninth Circuit will hold, the next step is the FTC’s in-house trial unless the FTC decides to drop the case. There would be plenty of reasons for that, but it’s their decision. The outcome of next month’s presidential election could affect the FTC’s position, but it would take time for new appointments to be made. At this point it’s impossible to predict the outcome. It could be a very close call in the end. If Democrats stay in power, the FTC will find it easier to carry on with its legacy cases. Should Republicans win, the question would be whether they drop the case once they have a majority (3) of the FTC commissioners or whether they let the FTC’s litigators continue their work.

For practical reasons, the FTC and Microsoft agreed that the FTC’s in-house trial would not take place sooner than 21 days after the Ninth Circuit ruling. The purpose is to give the parties time to digest the decision and build additional legal arguments on that basis (theoretically, the FTC could even decide to withdraw its complaint). But counsel for both parties, especially for Microsoft-ABK, is very busy. It would take a bit of luck for all key individuals to be available on three weeks’ notice. There may very well be some other court hearings and trials, or long-planned vacations or other circumstances, that delay the trial further. At this stage, it already looks fairly likely to slip into 2025 even if the Ninth Circuit decides next week.

After the in-house trial before the FTC’s Administrative Law Judge (ALJ), it will take several months (probably about four to five) until he issues a recommendation. The current FTC leadership downgraded that kind of opinion from a determination to a recommendation. They could have overruled the ALJ either way, but they wanted to make it even clearer that this is the way it is. If the commissioners like the ALJ’s decision, they’ll adopt it. Otherwise they’ll write their own decision. And from there, Microsoft can appeal if necessary.

The likelihood of this merger being undone by means of a forcible divestiture is extremely low. There was no credible theory of harm when this started. And now there have been pro-competitive, pro-consumer and pro-labor-union developments that further up the ante for the FTC.

3. Why doesn’t the FTC call it quits?

Again, there still is a possibility of the FTC dropping the case either because it’s discouraged by the Ninth Circuit decision (whenever it comes down, but it’s taken so long that it probably won’t take a whole lot longer) or because it decides to use its resources where there is a more urgent need for regulatory intervention.

The FTC is presumably realistic enough to know that an appeals court will hardly force Microsoft divest ABK or parts thereof (such as CoD). The following is not meant to suggest that it makes sense for the FTC to do this (it’s not a good use of resources), but an attempt to explain what the FTC may more realistically hope to achieve.

1. By simply seeing this through, the fTC may want to send out a signal to other merger parties that it is increasingly determined to stand its ground when it opposes a major merger. In the past, they typically withdrew after they failed to win a PI. It’s perfectly lawful to close a merger over the FTC’s objections after it has been denied a PI. That’s different from how it works in some other jurisdictions where parties need regulatory approval and have to appeal if the regulator withholds it. The FTC may hope to scare others away from closing in the same procedural situation. Some companies may be too concerned about years of residual uncertainty and call off some future mergers as a result of that. One can question the wisdom of the ABK case being a good example, given that it was approved in dozens of other countries, for the most part without any serious issues.
2. The FTC may hope that, even if this merger is not undone in the end, there could be some holdings in court decisions (such as the Ninth Circuit ruling on the PI denial, but also further down the road) that shape case law for future mergers. They may hope to move goal posts with a view to future cases. For instance, they don’t like it when parties like Microsoft do what is actually a positive and constructive thing and work out solutions through agreements with other market actors. The FTC also wants a lower standard for when it can obtain a PI, though hardly a merger would survive a PI obtained by the FTC, for practical reasons. Even if it made no difference in the end and ABK continued to belong to Microsoft, the FTC might be in a better position with a view to other cases. Here, again, the question is whether a merger that was never anticompetitive and has meanwhile benefited consumers is a suitable vehicle.
3. The FTC may also see an opportunity in further court losses: they may believe that it would help to persuade lawmakers that the FTC should get more power over mergers. By attempting to stretch the current envelope and tilting at the ABK windmill, the FTC isn’t necessarily positioning itself as an agency that should get more leeway.

This was an attempt to rationalize something that one doesn’t have to consider perfectly rational.

The FTC has an important task. Its current chair, Lina Khan, is the most aggressive and visionary one, at least in a long time. In general, she is right that U.S. competition enforcement needs to be strengthened. It just looks misguided to be obsessed with this particular deal. They should ask gamers (as their job is to protect America’s consumers): are you harmed by greater content exclusivity now? The answer will be no. There’s less exclusivity, even too little for some Xbox fans’ taste.