Context: The United States Court of Appeals for the Ninth Circuit held its FTC v. Microsoft & Activision Blizzard hearing (the Federal Trade Commission (FTC) appealed a district court’s July 2023 denial of a preliminary injunction against the transaction) in early December. Since then, 7 1/2 months have gone by without a decision, a fact that could also have other reasons but most likely means the three members of the panel struggle to agree on one or more legal questions. The longer it takes, the more things may happen in and out of court that lead particularly the FTC and certain class-action lawyers in charge of a mislabeled “gamers’ lawsuit” to make new filings with the appeals court (e.g., February 8, 2024 games fray article). Microsoft only informed the court of a relevant Supreme Court decision (as opposed to claiming that new facts should be considered) (June 17, 2024 X post (tweet) by games fray).
What’s new: On Thursday (July 18, 2024), the FTC filed yet another letter with the appeals court. This time around, the FTC argues that Microsoft’s Game Pass price change proves market power obtained through the acquisition of Activision Blizzard. The following day (July 19, 2024), Microsoft responded and explained that the price change is unrelated to the FTC’s vertical foreclosure theory of harm: neither is Microsoft withholding Call of Duty from the PlayStation nor from other subscription services.
Direct impact: The appellate judges obviously know that the appellants (the FTC and the class-action lawyers) can’t wait to get a decision. But it is up to them how quickly they decide, and while appeals of preliminary injunctions (or their denial) are generally considered urgent, the merger in question was consummated last year, making the matter objectively less urgent than even the average appeal from a final (post-trial) judgment. In legal terms, it is very difficult for the appeals court to attach any importance to the FTC’s and the class-action lawyers’ filings of factual representations. The filers know it and presumably hope to make a merely psychological impact.
Wider ramifications: The FTC’s in-house trial (before its own Administrative Law Judge) concerning this merger has been put on hold and will start three weeks after the appellate decision at the earliest. No matter what the appeals court decides in the preliminary injunction appeal before it now, the merger was closed in October 2023, making that appeal somewhat academic. Presumably, the FTC’s primary motivation is to move the legal goal posts with a view to future mergers. It would take years of litigation before this one could be theoretically (and not realistically) unwound by court order. Meanwhile, the plot keeps thickening that a new U.S. president (from one party or the other) will be elected, potentially changing the FTC’s agenda.
Let’s start with the FTC’s letter (which games fray previously shared on X (formerly known as Twitter)):
The FTC purposely misinterpreted what Microsoft told United States District Judge Jacqueline Scott Corley last year. For obvious reasons, Microsoft never said never: they didn’t promise to keep Game Pass prices at the same level for any particular period of time, much less for all perpetuity. What Microsoft argued was that there would be no price increases due to the merger reducing competition.
An oversimplified version is that they said they weren’t going to use the acquisition of ABK to displace all other game subscription services, only to be able to raise prices with impunity once they’d have attained monopoly power.
Everyone in the industry has recently increased prices, and there has been very significant inflation in the wider economy in recent years. Apart from that, Microsoft obviously had to retain the flexibility to redefine its offerings, which involves price changes that some may consider price increases while others may even feel they save money on the bottom line relative to the status quo ante.
As games fray predicted on X, it didn’t take long for Microsoft to respond:
First, Microsoft disputes that the new Game Pass Standard offering is a “degraded” version of the Game Pass for Console offering (which Microsoft decided to abandon). For users who wanted both the games catalog as well as multiplayer functionality, the total monthly subscription cost would have been $14.99 (games) + $9.99 (multiplayer) = $20.98, and now Game Pass Ultimate, even with the price going up from $16.99 to $19.99, is still below that combined price.
And yes, Call of Duty is a factor. But that doesn’t make it a merger issue.
The filing does not that “many new games” will become availale “day-and-date” now, which means it’s not just the price that changes, but also the value proposition.
The combination of CoD and (in the eye of the beholder) a higher price still doesn’t mean the FTC was right, and the letter explains why not:
- More than anything, the FTC’s case was based on the allegation of Microsoft acquiring ABK to withhold CoD from Sony’s PlayStation. That is obviously not the case as Sony took a ten-year deal in the end. It was definitely one of the FTC’s problems that it had to litigate in Judge Corley’s court (at the June 2023 preliminary injunction hearing) the case it had filed in December 2022, which was console-centric, while other regulators such as the European Commission and the UK Competition & Market Authority, which are governed by different sets of procedural rules, dropped the console theory of harm along the way and emphasized cloud gaming in their decisions.
- Subscription services were, therefore, a low priority for the FTC (the lowest one as even cloud gaming got more attention, but consoles were the primary theory of harm). Microsoft’s letter says the FTC now basically wants to win the appeal on a different basis than the one on which it lost in the district court. But the Ninth Circuit’s task is to review Judge Corley’s July 2023 decision based on the record at the time, not to reopen the record.
- The letter notes that “it is common for businesses to change service offerings over time.” This is common to many antitrust cases, and especially technology industry cases where things change rather quickly. Companies must retain at least some freedom to (re)define their offerings as the alternative would be a Soviet-style plan-based economy.
- Across all markets in which the FTC alleged the merger would result in a substantial lessening of competition (consoles, subscription services, cloud gaming), it made a vertical foreclosure argument: Microsoft would buy ABK to withhold key content from its rivals (or in the event of partial foreclosure, would not give others content of the same quality and/or at the same price).. But none of that has happened.
The purpose of the letter is to invite the appeals court to ignore the FTC’s letter. It’s not about “console wars.” But as a matter of fact, Microsoft notes that Sony increased prices without investing more in subscriptoin content:
“Sony’s subscription service continues to thrive, even as they put few new games into their subscription day-and-date, unlike Microsoft.”
In games fray‘s analysis, the FTC as well as reporters who alleged a price increase oversimplified things. What is true is that a certain entry point has been increased by $3/month. What is equally true is that, as Microsoft letter notes, customers get a lot of added value in the form of including the multiplayer feature, but especially also a lot of valuable content (most notably, but not limited to, CoD). Objectively, the distinction must be made between
- a higher entry point as a result (and possibly, as well as legitimately, an objective) of a product redefinition that also simplifies choices for customers, and
- a price increase, a term that suggests someone wants more money for the same thing.
In any event, what is happening here does not validate any of the FTC’s failed theories of harm.
It is impossible to predict how soon the Ninth Circuit will decide. In principle, the longer it takes, the more likely it is, as they will have to make a decision at some point. Even if they waited until after the presidental election in November, it would still take time before new commissions would be appointed to the FTC and potentially withdraw the case.
As the Ninth Circuit says in the FAQ on its website, “[it] has no time limit, but most cases are decided within 3 months to a year after [the oral hearing].” This appeal is already taking relatively long, but this is a peculiar situation in which a formally urgent matter is the opposite of urgent for all practical intents and purposes. Generally, courts at all levels don’t like the optics of taking more than a year to decide a case. That’s why it would be highly surprising if there still was no decision by the end of this year. Should the appeals court disagree with Judge Corley, it’s another question whether that disagreement changes the outcome. The appeals court could hold that the result is the same, though the FTC may appreciate some clarification that comes in handy in future cases. It could remand the matter to Judge Corley for further consideration. And for the FTC to actually get the merger undone, it would have to conduct its own trial, order a divestiture and defend that decision on appeal, all of which would still take years and would be very unlikely to actually result in a forced divestiture of ABK or parts thereof.