Context: Microsoft consummated the acquisition of Activision Blizzard King (ABK) in October 2023, but the U.S. Federal Trade Commission (FTC) is still pursuing an administrative proceeding (docket), now seeking to force Microsoft to divest ABK.
What’s new: On Thursday, Microsoft brought a discovery motion (PDF) that indicates Sony–which was the sole vocal complainant over the transaction, but signed a 10-year Call of Duty (CoD) deal in July–is clutching to a straw by supporting the FTC’s ultralong shot through selective production of evidence, focusing on internal documents that portray the deal in a negative light.
Direct impact: Even if Sony had not accepted the 10-year CoD deal, the FTC would be highly unlikely to succeed at this point. But the existence of certain remedial agreements, of which the Sony contract is arguably the most important one, further complicates the FTC’s efforts. If Microsoft’s motion is granted, it may be able to counterbalance Sony’s selective production or call into question the credibility of certain Sony witnesses.
Wider ramifications: After Sony’s extensive and aggressive campaign against the ABK deal, the 10-year deal could have marked an inflection point and the PlayStation maker could have sought to mend fences with Microsoft, which it could or possibly should view as more of a content partner than console rival. Microsoft’s filing with the FTC’s in-house judge sadly suggests the opposite.
Discovery disputes (i.e., disagreements over what evidence in the form of documents and/or testimony a party may obtain) are part of the “drudgery” surrounding U.S. litigation, but occasionally they bring interesting facts to light.
Microsoft’s December 21 filing with the FTC’s in-house court recalls that Sony’s PlayStation chief–Jim Ryan, the President and CEO of Sony Interactive Entertainment–originally stated in an email that Microsoft’s then just-announced acquisition of ABK was “not an [X]box exclusivity play at all” and wouldn’t harm Sony’s console business, only to embark a few months later on a campaign against the deal.
Microsoft stated from the beginning that it had no incentive or plans to withhold CoD from the PlayStation, and repeatedly stated its willingness to contractualize a commitment not only to continue to publish new CoD versions on the PlayStation for a long time to come but also to ensure parity (i.e., PlayStation customers would not be disadvantaged relative to Xbox customers with respect to pricing, performance, features, content, or in any other way). For a long time, Sony consistently rejected that deal as it might have dissuaded regulators from potentially blocking the transaction, with Mr. Ryan (in)famously having said on the day of an EU regulatory hearing:
“I don’t want a new Call of Duty deal, I just want to block your merger.”
In April 2023, when the Competition & Markets Authority of the United Kingdom decided to block the deal, that unconstructive strategy appeared to pan out. In July 2023, however, Sony saw the writing on the wall. The deal appeared more likely than ever to close, and Sony at long last signed a 10-year contract Microsoft had offered in December 2022 and which, according to an undisputed representation by Microsoft, “guarantees [Sony] better terms than it had with Activision.”
Microsoft’s filing of two days ago notes that “[o]ne would think that would have marked the end of [Sony]’s campaign against the Microsoft-Activision deal,” but “[i]t did not.”
Sony allegedly used a discovery request by the FTC primarily to make arguments against the acquisition of ABK
While Sony is not publicly speaking out against the deal anymore, Microsoft’s filing indicates that Sony “cherry-picked” 52 documents to provide to the FTC in response to the agency’s discovery request related to the Microsoft-Sony contract. The description of what those documents and particularly a “letter” are about is largely redacted. A footnote said Sony “made similar arguments in a letter to [a redacted recipient; presumably some competition regulator].”
A few pages later, Microsoft’s lawyers explain that “fewer than half” of the 52 documents provided by Sony actually relate to the 10-year PlayStation CoD agreement, and in particular, Sony provided “virtually no internal documents evidencing why [Sony took the deal in July 2023].”
The “fewer than half” ratio is suspicious. After all, the sole reason for which the FTC reopened discovery with respect to Sony was that particular deal. If more than half of the documents Sony then provided to the FTC are unrelated to that agreement, it means Sony seized this opportunity to rehash old or make new arguments against the ABK deal instead of responding to the actual question. Microsoft’s lawyers say:
“[Sony’s] selective production of documents was plainly intended to skew the story in its (and the FTC’s) favor.”
It did nothing to assuage Microsoft’s concerns that Sony has so far been uncooperative when Microsoft sought material beyond what Sony provided to the FTC. Sony is under a subpoena, which means that this discovery dispute is now at a stage where the next step would be court order reminding Sony of its obligations. A continued refusal to cooperate would result in sanctions.
Sony’s overall conduct indicates that the PlayStation maker is again trying to fight the acquisition even at this stage (where the deal has closed with approvals in more than 40 countries, the FTC lost in court before, and the FTC is highly unlikely to achieve anything).
Is Sony acting rationally?
Given how extremely unlikely the FTC is to succeed at this point, Sony’s behavior is less understandable than ever.
In retrospect, and assuming that the FTC’s dogged pursuit of a forcible divestiture won’t succeed, Sony shouldn’t have opposed the Microsoft-ABK deal after receiving the 10-year offer. If Sony had taken that deal in December 2022, it would not only have saved a lot of (management) time, money and energy, but it would also have maintained a reasonably constructive relationship with Microsoft and it wouldn’t have taken positions (on market definition and the impact of exclusive content deals) that could turn out to be a boomerang if antitrust authorities investigate Sony’s own behavior and future acquisitions. Moreover, Sony lost credibility when its initial internal impact assessment became publicly known owing to the FTC v. Microsoft preliminary injunction hearing in June 2022 (“we’ll be ok, more than OK” as well as very specific explanations as to why the ABK deal was more about mobile gaming than anything else, which is exactly what Microsoft consistently said).
If Sony had sued for peace in December 2022, the deal likely wouldn’t have closed before the following spring as Phase 2 investigations were underway not only in the EU but also in the UK. Delaying a rival’s deal by approximately half a year is not completely useless, but the combination of hard and especially soft costs makes it appear an unprofitable decision in this case.
Chances are that Sony’s executives were being delusional about their prospects of blocking a procompetitive deal or false hopes were raised in them by self-serving lawyers who stood something to gain (at least financially) even if Sony lost (as it ultimately did).
The conclusion of the 10-year agreement with Microsoft indeed looked like Sony had come to reason. Interestingly, Jim Ryan announced his retirement not long thereafter, without a permanent replacement being known at the time (they may still be searching for one), which strongly suggests the announcement had not been planned too long in advance.
A hypothetical but plausible explanation would be that Jim Ryan had been ordered by his boss (Sony Group’s CEO) to sign the agreement with Microsoft. Even if the wasteful (again, not just in monetary but even more so in political terms) crusade against the ABK deal had not been a factor in Mr. Ryan’s decision to retire, a new head of the PlayStation could normally have sought a rapprochement with Microsoft without having been personally responsible for what happened before his tenure.
In the end, everyone will have to maximize shareholder value. That is a fiduciary duty. Microsoft is not going to “punish” Sony. Still, if companies are on better terms with each other, they will potentially do better business.
The fundamental question for Sony is whether to view Microsoft primarily as a console rival or as a content partner, a cloud service provider, and also a potential ally against the mobile duopoly (Apple and Google). The PlayStation division is Sony’s most profitable business area. It’s a cash cow, and while the hardware itself isn’t all that lucrative, Sony tries to milk its customer base. The fact that Microsoft tries to give gamers better value (such as through day-and-date releases of AAA titles on its Game Pass subscription services) is inconducive to Sony’s profitability:
The Sony-internal slides (the authenticity of which has not been disputed; if anything, it has been indirectly confirmed by a copyright-based takedown request) appear to be from just before Microsoft extended the duration of its proposed CoD agreement to ten years. Apart from that, it’s important to distinguish between competitive and anticompetitive behavior: if Sony fears it will make less money, or will have to try harder and invest more, that may just be the essence of competition and, therefore, in the interest of consumers.
It has recently become known (as a result of the FTC’s continuing opposition to the deal) that some Microsoft-internal document expressed hopes that the acquisition of ABK would result in incremental Xbox sales. That, too, is not necessarily anticompetitive, and actually more likely to be the very opposite: the last thing the antitrust laws were intended to do is to shield incumbents from competition, even if the current FTC sometimes appears oblivious to that fact.
Simply put, foreclosure (withholding something from rivals like Sony) is not the only way to increase Xbox sales. If you ask me, I believe it’s actually the opposite: it also increases Xbox sales if the acquisition thwarts Sony’s efforts to disadvantage the Xbox with respect to ABK content such as CoD (where PlayStation gamers received significant benefits and Microsoft, as its executives testified in court, even faced marketing restrictions because of an agreement between Sony and ABK). In other words, less foreclosure (by Sony) means more Xbox sales.
Other ways in which the acquisition can benefit the Xbox are more subtle. For instance, by virtue of the enormous popularity of ABK’s titles, the Xbox may get more mind share. More mind share is an opportunity to compete, but in the end customers still have the choice to buy one console or the other, or two or three consoles.
With its cross-media assets (TV, music, video games), and in light of the continuing shift to mobile, Sony could change its business model. For now, however, it appears that Sony focuses on risk, not opportunities; on rivalry, not the potential for constructive “coopetition” (cooperation and competition); and has apparently not only reverted to the attitude of “I just want to block your merger” but is now trying so despite the prospects of a forcible divestiture of a procompetitive deal being next to nil.
Next steps
Presumably Microsoft will be allowed to take at least some discovery of Sony with respect to the subject matter of the FTC’s discovery request. The FTC’s Chief (and only) Administrative Law Judge D. Michael Chappell has previously ruled on those requests in an even-handed manner as far as I could see from the outside. It would be disconcerting if he allowed Sony to get away with selectivity.
Whether Microsoft’s lawyers will then find any documents from Sony’s internal discussion of the 10-year CoD deal that counterbalance the negativity of what Sony provided to the FTC remains to be seen. It can’t be ruled out that Sony’s executives were being extremely careful at the relevant time, knowing that all of this could end up in court.
The FTC’s in-house trial won’t take place before 21 days after the United States Court of Appeal for the Ninth Circuit has ruled on the FTC’s appeal of the denial of a preliminary injunction in July. A recent Fifth Circuit decision doesn’t bode well for that appeal:
It is quite possible that the Ninth Circuit decision will turn on legal questions that have no bearing on the FTC’s in-house case (or a subsequent appeal) in any way. But it might, so it obviously makes sense to wait.
After the FTC’s in-house trial, which Microsoft’s counsel (due to a scheduling conflict) would prefer not to begin before May in any event, ALJ Chappell will have roughly five months to issue a recommendation. Thereafter, the commissioners themselves (which makes mockery of the concept of checks and balances) will make the actual decision, which will then be appealable to a federal appeals court (which is what the Ninth Circuit is as well). There is, however, always the possibility of the FTC recognizing its error and withdrawing its administrative complaint, before or after the 2024 presidential election.
games fray will continue to keep an eye on those proceedings, not because there is a non-negligible likelihood that Microsoft might in the end (after an appeal) have to divest ABK or any part of it, but because–as this article just showed–there is always the possibility of interesting information becoming public.