The Federal Trade Commission has betrayed the underpinnings of antitrust law by pursuing an injunction against Microsoft’s $68.7 billion acquisition of video game developer Activision Blizzard, the merging companies have argued.
In its response to the agency’s administrative complaint filed on 22 December, Activision said the FTC filed its “ideologically-fuelled” lawsuit while ignoring the transaction’s benefits to consumers and competition because of its prejudice against high-value technology deals.
“The FTC’s disregard for these benefits to consumers and focus on supposed harms to Xbox’s deep-pocketed competitors betrays a fundamental disconnect between the FTC’s theories and the antitrust laws’ underlying purpose, which is to protect competition, not competitors,” wrote counsel to Activision at Skadden Arps Slate Meagher & Flom.
In its own response, Microsoft claimed the FTC hastily brushed off its commitments to make Activision’s extensive catalogue – including the hit Call of Duty franchise – available to even its strongest rival, Sony’s PlayStation. Degrading or depriving gamers’ access to Activision titles would actively harm its business, Microsoft said.
“Giving consumers high-quality content in more ways and at lower prices is what the antitrust laws are supposed to promote, not prevent,” wrote counsel to Microsoft at Wilkinson Stekloff and Weil Gotshal & Manges.
The FTC sued to enjoin Microsoft/Activision last month, claiming the transaction would create an unlawful monopoly for high-performance gaming consoles like the Xbox Series X|S plus two types of video game subscription services. The FTC excluded other consoles like the Nintendo Switch from its market definition because it considered they lack the computing capacity necessary to compete with Sony’s and Microsoft’s consoles.
The agency also alleged that the deal would increase Microsoft’s incentive to withhold Activision’s so-called “AAA titles” – games with the largest budgets and fan base including Call of Duty and Overwatch – from its competitors.
Microsoft is no stranger to keeping acquired titles exclusive, the FTC claimed. The defendant has already denied Sony access to games made by one of its 24 game developers, ZeniMax Media, the FTC said.
Microsoft challenged that assertion, noting that it fulfilled its promise to the European Commission to honour Sony’s existing exclusivity rights over ZeniMax games. The company did not commit to distributing future games this way, it said.
According to Axios, the European Commission said Microsoft did not make any commitments with respect to Zenimax when the authority reviewed and unconditionally cleared the deal in 2021.
The merging companies also asserted that making Activision titles, particularly Call of Duty, exclusive would be “disastrous” for Microsoft’s reputation and earnings. Xbox would not only lose billions in earnings, but would alienate a large portion of Activision’s customers that it paid billions to obtain, the defendants said.
“The player backlash from making the Call of Duty franchise Xbox-exclusive would be devastating,” Activision wrote in its reply. “It would destroy the trust Xbox has fostered with gamers, leading frustrated gamers to vote with their wallets and shift their attention away from Xbox offerings.”
The company added that it had no intention of making its games available on cloud gaming or subscription services without the merger, arguing that the FTC’s allegations to the contrary “reek[] of desperation”.
Microsoft agreed that any hypothetical economic benefit would not outweigh the damage exclusivity would inflict on its reputation. It cited its contract with Nintendo to offer Call of Duty on its consoles for 10 years and a similar proposed deal with Sony, claiming that expanding access to Activision’s portfolio of popular games is simply good business.
Even if it did withhold those games, the company has said that Activision’s titles are not significant enough on their own to cause antitrust harm in the gaming industry.
Activision agreed, arguing in its reply that “no game or franchise is important enough to make or break a gaming platform” in such a dynamic industry.
While the commission focused on Microsoft’s presence in existing high-end gaming markets, the company claimed that its goal is to break into the fast-growing mobile gaming industry. The defendant said a third of Activision’s revenues come from mobile games, while Microsoft has next to no involvement in that market.
In an interview last month, Microsoft president Brad Smith expressed hope his company would be able to compromise with the FTC given his experience meeting with chair Lina Khan in early December.
“She [Khan] did not take me up on my offer, but when I said give peace a chance, she smiled at least a little,” Smith told the New York Times. “So any time somebody can end a meeting by smiling even a little, there’s always a little hope that we can sit down together in the future.”
At a pretrial conference yesterday, FTC staff attorney James Weingarten said that while the staff has been instructed to engage in settlement talks, no “substantive discussions” are occurring yet.
At the same time, it appears Microsoft is gearing up to litigate the case in court as trial firm Wilkinson Stekloff now appears as counsel in its filings.
Named partner Beth Wilkinson has previously represented the likes of Altria, the National Football League and the National Collegiate Athletic Association. During the Obama Administration, the FTC hired Wilkinson – then with Paul Weiss Rifkind Wharton & Garrison – to serve as outside counsel while it investigated Google.
The FTC did not respond to requests for comment.
Counsel to Microsoft
Wilkinson Stekloff
Beth Wilkinson, Rakesh Kilaru, Kieran Gostin, Grace Hill, Anastasia Pastan and Sarah Neuman in Washington, DC
Weil Gotshal & Manges
Partners Michael Moiseyev, Megan Granger and Vadim Brusser in Washington, DC, Niklas Maydell in Brussels and Jenine Hulsmann in London, and counsel Chris Chapman and Nafees Saeed in London
Counsel to Activision Blizzard
Skadden Arps Slate Meagher & Flom
Partners Steven Sunshine in Washington, DC, Maria Raptis in New York, Bill Batchelor in Brussels and London, Ingrid Vandenborre in Brussels and Andrew Foster in Hong Kong
