The Federal Trade Commission is trying to block Microsoft from acquiring Activision Blizzard, Inc. in a $69 billion all-cash deal, which would be the tech giant’s largest acquisition to date. The FTC alleges that Microsoft could potentially suppress Xbox competitors as Microsoft makes investments in subscription content and cloud-gaming, a violation of Section 5 of the FTC Act.
“Microsoft has already shown that it can and will withhold content from its gaming rivals,” said Holly Vedova, Director of the FTC’s Bureau of Competition, in a December 8, 2022 news release. “Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”
In the FTC’s December 8, 2022 complaint, the FTC says that Activision is one of the most valuable game developers and the merger would be the largest in video game history. The deal would, in effect, “continue Microsoft’s pattern of taking control of valuable gaming content.” It would impact the gaming console, subscription gaming, and cloud gaming markets.
“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,” says the FTC in their complaint.
The FTC also says that Microsoft and Sony command the market for high-performance video game consoles. Through the company’s in-house game studios, Microsoft develops popular games like Halo and other “first-party” titles. The tech giant also offers popular game subscriptions, Xbox Game Pass and Xbox Game Pass Ultimate which offers cloud gaming functionality.
Activision offers high-quality video games for game consoles, PCs and mobile devices, producing AAA titles like Diablo, Overwatch and Call of Duty. Microsoft could potentially acquire those through the deal and make those games and franchises exclusive to Xbox. According to the FTC, Call of Duty first launched in 2003, and Activision releases new titles for the Call of Duty franchise each year. It is a leading AAA franchise, generating $27 billion in revenue between 2003 through 2020. The exact number of players is in the millions, though the figure was redacted in the FTC complaint.
“Activision’s content is extremely important for, and drives adoption of, video game consoles. Given their immense popularity, Activision’s titles are of particular importance to console makers, including Microsoft’s competition,” the FTC says.
This is just one of more than 10 third-party studio acquisitions by Microsoft in recent years. The FTC alleges that Microsoft has “frequently” made the acquired titles exclusive to the Xbox console and/or to its subscription offerings, so players cannot play the games on non-Xbox devices.
“The Proposed Acquisition is reasonably likely to substantially lessen competition or tend to create a monopoly in multiple markets because it will create a combined firm with the ability and increased incentive to use its control of Activision titles to disadvantage Microsoft’s competitors. The Proposed Acquisition also may accelerate an ongoing trend towards vertical integration and consolidation in, and raise barriers to entering, the relevant markets,” writes the FTC.
In its complaint, the FTC talks about the growth in popularity of the subscription model for gaming. Subscribers pay a monthly or annual subscription fee in exchange for access to games. Launched in 2017, Xbox Game Pass launched in 2017, and now has 25 million subscribers. For $9.99 a month, Xbox Game Pass subscribers can play more than 300 first- and third-party games. Xbox Game Pass Ultimate subscribers pay slightly more – $14.99 a month – to download games for play on an Xbox game console or a PC. In addition, subscribers can stream games from an off-site server to any web-enabled device that can access Game Pass. Sony offers a similar subscription called PlayStation Plus Extra.
The Commission voted 3 to 1 with Commission Christine S. Wilson dissenting. The FTC hopes to block the acquisition, and require that any combination of the two businesses must be approved by the FTC. Microsoft has 14 days from the filing to date to reply to the FTC’s complaint. An evidentiary hearing is set at the FTC offices in Washington, D.C. for August 2, 2023.
Microsoft likely to challenge FTC
In a December 8 statement, Microsoft president Brad Smith said the company will likely challenge the FTC’s complaint, reports the Associated Press.
“While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court,” said Smith. “We continue to believe that this deal will expand competition and create more opportunities for gamers and game developers.”
Insider Take
Microsoft first announced the deal in January 2022, citing they would acquire Activision Blizzard for $68.7 billion in an all-cash deal. At that time, the deal was said to make Microsoft the third-largest gaming company by revenue, following Tencent and Sony. The boards of Microsoft and Activision Blizzard have both approved the deal, but Microsoft may not make it over the necessary regulator hurdles. Based on the timeline, unless Microsoft and the FTC come to some sort of an agreement, this acquisition could be further postponed or blocked altogether.
