FTC Moves For A Restraining Order Stop Microsoft, Activision Blizzard Merger From Consummating

We’ve been covering Microsoft’s attempt to acquire Activision Blizzard for months now and it just keeps getting more and more interesting. A very quick primer: Microsoft is seeking to acquire the company for a bonkers amount of money, the EU has already approved the deal, while the UK’s CMA has blocked it, and the FTC has filed suit to block it as well. The EU approval notwithstanding, the other two regulatory blocks represent serious challenges to this deal ever moving forward. Microsoft also made a point of stating previously that it would not finalize the deal while any pending litigation with the regulators was still going on.

It appears that the FTC doesn’t believe that claim, however. The commission has just petitioned in court for a temporary restraining order that would bar the deal from being consummated until its suit is resolved. And within that petition are some interesting hints as to what the FTC’s argument against the deal is going to be.

But first, the petition.

The FTC filed its complaint (PDF) for a temporary restraining order and preliminary injunction against Microsoft and Activision Blizzard’s injunction. The complaint claims that the parties “may consummate the Proposed Acquisition at any time,” despite pending actions with both the FTC and the UK antitrust authority.

The complaint specifically cites the long success of the Call of Duty franchise, the instant success of Diablo IV, and Overwatch 2 as “a successful new title,” in suggesting why Microsoft’s ownership of both Activision and its own gaming platforms would be problematic. A merger, the FTC writes, would be “reasonably likely to substantially lessen competition and/or tend to create a monopoly” in “high-performance consoles, multi-game content library subscription services, and cloud gaming subscription services.”

The filing itself goes further than that, which is where we get into some of the specifics the FTC is going to bring to the table in its suit. There are the normal claims you would expect in a suit like this: it would reduce competition and harm consumers in terms of choice, pricing, etc. But unlike the CMA’s tacit focus on the cloud gaming space, the FTC specifically calls out the console market as among the primary concerns.

Microsoft and Sony control the market for high-performance video game consoles. The number of independent companies capable of developing standout video games for those consoles has contracted, with only a small group of firms commanding that space today. Microsoft now proposes to acquire Activision, one of the most valuable of those developers, in a vertical merger valued at nearly $70 billion (the “Proposed Acquisition”) that will increase Microsoft’s already considerable power in video games. If consummated, the Proposed Acquisition would be the largest in the history of the video game industry and the largest in Microsoft’s history. The Proposed Acquisition would continue Microsoft’s pattern of taking control of valuable gaming content. 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.

Microsoft, one of only two manufacturers of high-performance video game consoles, develops and sells Xbox gaming consoles. Microsoft is vertically integrated: through its in-house game studios, it develops and publishes popular video game titles such as Halo. Such in-house games are known as “first-party” titles in the industry.

And then it goes on into the cloud side of Microsoft’s business. But in those two paragraphs, the FTC does two things. First, it puts a spotlight on the console market instead of focusing solely on cloud-gaming. That will become important in a moment. Second… it sort of digs at Nintendo for not being on the same level as Sony and Microsoft. That isn’t really important for this post, but I like to imagine Nintendo execs reading this and feeling super insulted by it. Why? I don’t know, but it makes me happy.

So why is that focus on the console market important? Because another section of the filing makes it clear that the FTC is going to tell the court at trial that Microsoft simply isn’t to be believed as to its plans to keep titles from being pulled into exclusivity arrangements.

Microsoft’s past conduct provides a preview of the combined firm’s likely plans if it consummates the Proposed Acquisition, despite any assurances the company may offer regarding its plans. In March 2021, Microsoft acquired ZeniMax Media Inc. (“ZeniMax”), the parent company of the well-known game developer and publisher Bethesda Softworks LLC (“Bethesda”). Microsoft assured the European Commission (“EC”) during its antitrust review of the ZeniMax purchase that Microsoft would not have the incentive to withhold ZeniMax titles from rival consoles. But, shortly after the EC cleared the transaction, Microsoft made public its decision to make several of the newly acquired ZeniMax titles, including Starfield, Redfall, and Elder Scrolls VI, Microsoft exclusives.

Yup. Fool me once, shame on you. Fool me twice? Something about George Bush, if I’m recalling the saying correctly.

The TRO is being sought because the FTC doesn’t have the power to block the deal being signed during litigation without it. Instead, the suit, if successful, would have to un-ring that bell, in a manner of speaking. Whether it’s granted or not remains to be seen, but the request for the TRO is downright scathing.