2022 saw a major uptick in antitrust scrutiny and enforcement,
primarily related to vertical transactions by large technology
companies. Meta/Within, Microsoft/Activision, and
Broadcom/VMware (among others) faced resistance from, or were
challenged by, antitrust agencies alleging theories of harm ranging
from the traditional (i.e., input foreclosure)1 to the
more novel (i.e., a loss of potential future competition). We
expect this trend to continue in 2023, with global agencies
continuing their skepticism of vertical transactions and exploring
all potential theories of harm, novel or otherwise.
Background and Updates to Technology Transactions We’re
Monitoring
Meta/Within Update
The Federal Trade Commission (FTC) filed a complaint in July
seeking to block Meta’s acquisition of the virtual reality (VR)
app maker Within.2 Meta makes Meta Quest, a leading VR hardware
device. It also operates the Oculus Quest app store and sells
several best-selling VR apps. Within’s flagship product is a VR
fitness app called Supernatural, which provides users with virtual
fitness classes for a monthly subscription fee.3
The FTC’s complaint relied on two varieties of the potential
competition theory of harm: “actual” and
“perceived” potential competition. Under the FTC’s
actual potential competition theory, but for the acquisition of
Within, Meta would have become a competitor in the dedicated VR
fitness app market. In its filings and at trial, the FTC tried to
establish that Meta had the “resources, capabilities, and
incentives to enter the VR Dedicated Fitness App market” and
“intended to do just that but for the proposed
acquisition” of Within.4 The FTC’s other theory
of harm, a perceived potential competition theory, alleges that
even if Meta wouldn’t have actually entered the market, Within
perceived Meta as a potential entrant, and the elimination of
Meta’s perceived competition would therefore substantially
lessen competition.5
A three-week trial in the Northern District of California began
on December 8, 2022. On February 1, 2023, the court ruled in favor
of Meta, rejecting the FTC’s request for a preliminary
injunction6 and clearing the way for the acquisition to
close after the agency decided not to appeal the
decision.7
Unsealed on February 6, Judge Edward Davila’s decision
ultimately found that the agency had failed to meet its burdens
with respect to the potential competition theories it had put
forth. Although the FTC lost on the facts, however, Davila rejected
the parties’ claims that these potential competition theories
were not legally cognizable or were subject to extremely high
thresholds of proof. Further, Davila accorded “little
weight” to the testimony provided by Meta’s employees
during the litigation, concerned that such “ex post facto
testimony” would be inherently and unavoidably biased. With
regard to Meta’s motives and plans, Davila looked instead to
“contemporaneous statements made by Meta employees”
(i.e., ordinary-course documents).
The ultimate outcome for the agency is mixed. While this
decision adds to a recent string of losses for the FTC, the agency
now has a road map for future potential competition cases, with
respect to both the legal standards/burdens and the types of
evidence about the specific parties and the product markets more
generally likely to be deemed probative in that context.
While the FTC has historically dropped parallel administrative
actions when it loses a preliminary injunction action in federal
court,8 as of this writing, the FTC has not indicated
whether it will move forward in this instance. Considering that the
agency under Chair Lina Khan has bucked unwritten rules in the
past, we would not be surprised to see the FTC use every available
resource to challenge the transaction and proceed with the
administrative trial.
Microsoft/Activision Update
Microsoft’s acquisition of Activision, which was announced
in January, ran into several major challenges in 2022. The deal has
a clear vertical component given that Microsoft manufactures Xbox,
one of the three top-selling video game consoles, and Activision
Blizzard makes one of the most popular video game franchises, Call
of Duty. Activision Blizzard also makes popular PC and mobile video
games, such as World of Warcraft and Candy Crush. Microsoft’s
acquisition of a strong and innovative video game developer could
be seen as a move into business lines that are distant from, though
in the same ecosystem as, the company’s “core”
business lines including PC software (Microsoft Office) and video
game hardware (Xbox).
Microsoft has publicly committed to making Call of Duty
available to its biggest rivals, PlayStation and Nintendo, for 10
years once the game launches on Microsoft platforms.9
Although Nintendo accepted the proposal, Sony has vehemently
opposed the transaction, arguing it would harm competition around
the globe. Behavioral fixes like the one proposed by Microsoft have
historically been acceptable to antitrust regulators. But in recent
years, regulators’ views, including those in the EU, UK, and
US, have shifted toward greater skepticism of vertical transactions
and the ability of behavioral remedies to alleviate competition
concerns.
On December 8, 2022, the FTC filed an administrative lawsuit
challenging the merger.10 In its complaint, the FTC
alleges the acquisition would “enable Microsoft to suppress
competitors to its Xbox gaming consoles and its rapidly growing
subscription content and cloud-gaming business.”11
In other words, the FTC alleges that Microsoft could block new Call
of Duty games from being offered on its rivals’ consoles,
giving the Xbox an unfair advantage. The agency also focused on
Microsoft’s burgeoning subscription and cloud-based gaming
service (Game Pass), where subscribers get access to hundreds of
games for a single monthly fee. Adding Call of Duty (and other
Activision Blizzard games) to this service and blocking it from
rivals (e.g., PlayStation Plus) would also create an unfair
advantage, according to the agency.
As Microsoft gears up for the administrative trial in the US,
the Competition and Markets Authority (CMA) issued its Provisional
Findings in its Phase 2 investigation.12 The CMA
provisionally found that the merger gives rise to a substantial
lessening of competition (SLC) regarding (i) input foreclosure in
the supply of console gaming in the UK, based on a finding that
Microsoft would find it commercially and financially beneficial to
make Call of Duty exclusive to Xbox or available on Xbox on
materially better terms than on PlayStation, and (ii) input
foreclosure in the (nascent) cloud gaming services market in the
UK.
As is standard in cases where an SLC has been identified, the
CMA also published a Notice of Possible Remedies. This document
acts as a formal starting point for the discussion of remedies with
the merging parties and soliciting views from the market. The
CMA’s current position is that Microsoft should divest the
Activision Blizzard businesses associated with its Call of Duty
game, or for the merger to be prohibited entirely. Unsurprisingly,
the CMA has shown reluctance to consider behavioral remedies, which
could just be posturing at this stage; however, the CMA (in common
with other authorities) is willing to accept behavioral remedies
only in limited circumstances, so Microsoft has a high bar to
convince the CMA that a behavioral commitment would be workable in
this case (e.g., a commitment to supply Call of Duty to its
rivals).
The European Commission (EC) also continues its own in-depth
investigation and, as with the FTC and CMA, is expected to oppose
the deal and/or require significant remedies. The deal is also
still under review by authorities in Australia, Japan, New Zealand,
and South Korea.
Broadcom/VMware
Microchip maker Broadcom’s proposed acquisition of the
software company VMware has generated significant headwinds despite
the fact that the parties seem to be in adjacent, not horizontal or
vertical, markets. Broadcom is a semiconductor company that
primarily designs and sells (but does not manufacture) chips for
the wireless and broadband communication industry. VMware, by
contrast, is in the cloud-computing and visualization space,
providing cloud infrastructure and virtual machine services,
largely for enterprise customers.
The FTC issued second requests to the parties in early July, and
the EC announced an in-depth investigation of the transaction in
late December 2022. When announcing the investigation, Margrethe
Vestager, the EC’s head of antitrust enforcement, said the
commission had concerns that Broadcom could eliminate its
competitors’ access to VMware’s virtualization software.
The EC previously investigated Broadcom for its sales tactics,
resulting in a seven-year consent decree.
The additional scrutiny could be due to the strength of
Broadcom’s chips and VMware’s cloud management software in
the broader cloud ecosystem. Or it may simply be a reflection of a
more aggressive antitrust environment, particularly with respect to
large players in the technology space that have been scrutinized by
antitrust agencies for either conduct or proposed mergers in the
past.
Conclusions and Predictions for 2023
2022 saw global antitrust agencies taking an aggressive approach
to vertical and adjacent transactions in the technology space. We
expect this trend to continue in 2023. Even if certain transactions
are ultimately able to proceed (such as Meta/Within after winning
in federal court), global antitrust agencies are signaling they
will leave no stone unturned in their investigations of
transactions, including those that lack traditional horizontal
concerns.
Footnotes
1. CRN, “Broadcom-VMware Deal Under Pressure In US, EU:
Five Things To Know“ (Dec. 22, 2022).
2. Complaint for a Temporary Restraining Order and
Preliminary Injunction, FTC v. Meta Platforms Inc., Mark
Zuckerberg, and Within Unlimited, Case No. 5:22-cv-04325 (N.D.
Cal. July 27, 2022) (hereinafter “Meta/Within
Complaint”).
3. Supernatural, “Get
Supernatural.”
4. Plaintiff’s Reply to Defendants’ Opposition to
Prelim. Injunction Motion, FTC v. Meta Platforms Inc., Mark
Zuckerberg, and Within Unlimited, Case No. Case 5:22-cv-04325, at 1
(N.D. Cal. Nov. 21, 2022).
5. Plaintiff’s Mem. of Points and Authorities in
Support of Mot. for a Prelim. Injunction, FTC v. Meta Platforms
Inc., Mark Zuckerberg, and Within Unlimited, Case No. Case
5:22-cv-04325, at 211 (N.D. Cal. Oct. 31, 2022), available at https://www.law360.com/articles/1545376/attachments/1.
6. Order Denying Plaintiff’s Motion for Preliminary
Injunction, FTC v. Meta Platforms Inc., Mark Zuckerberg, and Within
Unlimited, Case No. Case 5:22-cv-04325, at 211 (N.D. Cal., 2022),
available at https://www.documentcloud.org/documents/23598337-ftc-vs-meta-within-ruling?responsive=1&title=1.
7. The Verge, “Meta wins fight to buy VR startup Within“
(updated Feb. 4, 2023); Reuters, “US FTC will not appeal decision allowing Meta to
purchase VR content maker Within” (Feb. 6,
2022).
8. The agency did not bring a preliminary injunction in
federal court in Illumina/GRAIL due to a belief the
parties would not consummate over the EU’s ongoing
objections
9. CNBC, “
Microsoft says it will bring Call of Duty to Nintendo for 10 years
if Activision deal closes” (Dec. 7, 2022).
10. Similar to Illumina/GRAIL, the FTC is not
currently seeking a preliminary injunction in federal court to
block the transaction due to Microsoft’s ongoing engagement
with the EC.
11. Administrative Complaint, In re FTC v. Microsoft
Corp. and Activision Blizzard Inc., Docket No. 9412 (Dec. 8,
2022).
12. Competition & Markets Authority,
“Anticipated acquisition by Microsoft of Activision Blizzard,
Inc.: Provisional findings report ” (February 2023). Available
at: https://assets.publishing.service.gov.uk/media/63e3e9aee90e0762692b970a/Microsoft_Activision_-_Provisional_Findings_Report_3.pdf.
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