The Journal. - Microsoft’s Big Win Against the FTC

Episode Date: July 12, 2023

Microsoft has cleared a big hurdle to purchase Activision Blizzard, the publisher of popular videogame franchises like “Call of Duty, “World of Warcraft” and “Candy Crush.” The Federal Trade Commission had tried to block the roughly $75 billion acquisition, but a federal judge has allowed the deal to move forward. WSJ’s Jan Wolfe explains what the ruling means for Microsoft and for the FTC.  Further Reading: -Microsoft Can Close Its $75 Billion Buy of Activision Blizzard, Judge Rules  -Lina Khan Is Taking on the World’s Biggest Tech Companies—and Losing  Further Listening: -Why Microsoft is Paying $75 Billion for Activision Blizzard  -Microsoft CEO Satya Nadella’s Big Bet on AI  Learn more about your ad choices. Visit megaphone.fm/adchoices

Activision Blizzard is the publisher of some of the most popular video games in the world. There's Candy Crush, a mobile game where you match candies to earn points. There's also World of Warcraft, a multiplayer online game where users roleplay as creatures like elves or trolls. Scour the island for any sign of the expedition. And then there's Activision's crown jewel, Call of Duty. It's a first-person shooter video game series, and it's hugely popular. These titles are super lucrative, which is why Activision wound up on the radar of a tech giant, Microsoft. Microsoft is the maker of one of the best-selling video game consoles, Xbox.

And it wants to add Activision's games to its portfolio. Last year, Microsoft made a bid to acquire Activision. Here's our colleague Jan Wolf. You're taking one of the main console makers and pairing it, or at least attempting to pair it, with the maker of the most popular video games. So, you know, this deal is going to really shape the video gaming market. And with three billion gamers worldwide, you know, that's a huge market. This deal has been valued at about $70 billion, making one of the biggest M&A deals ever. It's a controversial move, and the Federal Trade Commission has been trying to block the deal in court,

saying it could give Microsoft too much power in the gaming industry. But this week, a federal judge ruled in favor of Microsoft, clearing a major hurdle for the acquisition. And what's at stake here is also the reputation of the regulator, the FTC. And, you know, now that the FTC has lost before a district court judge, you know, it's going to have some explaining to do about why it chose to bring this case and use its resources on it. Welcome to The Journal, our show about money, business, and power.

I'm Jessica Mendoza. It's Wednesday, July 12th. Coming up on the show, why Microsoft's big win is putting the FTC in the hot seat. Need a great reason to get up in the morning? Well, what about two? Right now, get a small, organic Fairtrade coffee and a tasty bacon and egg or breakfast sandwich for only $5 at A&W's in Ontario. Microsoft's Xbox is super popular, but it's up against some tough competition.

Sony's PlayStation and the Nintendo Switch. For years, Microsoft has been looking for a way to gain an edge. Microsoft is finding itself in third place in the console market. And so it's looking for, you know, ways it could pivot or set itself apart from its two rivals. And cloud gaming is seen by many people as this like potentially very lucrative, important future. many people as this potentially very lucrative, important future. Cloud gaming. The idea is, instead of buying games on a disc or having to download and install a game before playing, you can just stream a game, like you would with a movie on Netflix. Microsoft has been testing the feature on the Xbox, and it wants to lean even more into the technology. Microsoft's vision, at least what it stated it wants to see in the future in cloud gaming,

is a reality where for maybe a monthly fee, you're able to play pretty much any game you want on pretty much any device you have. And it's sort of mirroring how people stream TV. And that's like about breaking down proprietary rules about, you know, you can only play certain games on certain devices. And it says that this deal can help it achieve that because it would create a big catalog of games that Microsoft can start with to start hooking people into that kind of approach. Microsoft announced its plans to acquire Activision in January 2022. The deal quickly raised alarms at the FTC.

The agency had antitrust concerns, meaning it was worried the deal would stifle competition. I think it was inevitable that there would be antitrust scrutiny of this deal, given the massive amount of money at stake and the fact that, you know, you're pairing this powerhouse video game developer with a console maker, you know, that could give Microsoft a lot of power, right? And so the theory that the FTC settled on, I mean, let's say the main theory is this idea of exclusivity, that there's this concern that Microsoft would make Call of Duty

exclusive to Xbox to get people to buy more Xboxes. Why would it be a problem for a company to make a game or to own a game that is exclusive to its platform, according to the FTC? The FTC's mandate is to think about consumers. It enforces antitrust law and it writes regulations that are meant to help consumers. It wants to ensure fair trade practices. Video gaming is the most growing part of the entertainment media landscape, so to speak. You know, every year more and more people play video games. Video gaming is a massive industry and that's one reason the FTC was worried.

They don't want Call of Duty to be exclusive to one device maker. In December of last year, the FTC sued to block the deal. Microsoft rejected the FTC's antitrust claims. And it said publicly that it intended to acquire Activision in a way that wouldn't hurt competition. You know, Microsoft has said that, you know, we have zero interest in making Call of Duty exclusive to Xbox. It's not in our economic interest to do so because not as many people played a game and it would piss off everybody and ruin our reputation within gaming.

So they're just saying there's zero chance. And to prove that, they have, you know, offered these deals already to make sure that you can play Call of Duty on a Nintendo device, on a Sony device. Microsoft seemed to say that the deal was actually good for competition. Could you explain what they meant by that? So the entire fight was in essence about whether this deal was pro-competitive or anti-competitive.

Microsoft's argument is that this deal was pro-competitive because the company is trying to achieve this cloud gaming future where you could play pretty much any game on any device for a flat fee. And it thinks that consumers want this, and I think that's right.

I mean, that is appealing to consumers in its simplicity and the potential cost savings over a more proprietary world where you have to get certain games on certain consoles or just spending more money. And that's Microsoft's argument that, let us do this deal and pool these resources

and we can deliver a future for gaming that people are going to like, that consumers are going to like, and it won't raise prices. It'll actually lower them. Hmm. This might be sort of a weird question, but how can Microsoft make that argument if cloud gaming isn't really a thing yet? Well, I think it's understandable to be a little skeptical of what Microsoft is saying because the cloud gaming vision is in its early days. So who knows what the future will look like? Microsoft is laying out a vision for how this deal can be pro-competitive that is inherently speculative.

And that's a challenge in any antitrust case, whether you're Microsoft or you're the FTC. We're dealing with unknowns here about what the future might look like, and we're putting experts up on a stand to lay out different scenarios that can come to pass. So, you know, if you're the regulator, it's kind of hard to say like, well, we're certain this is going to be bad for consumers because you're inherently speculating. In her ruling yesterday, U.S. District Judge Jacqueline Scott Corley sided with Microsoft. She said the FTC didn't show

that Microsoft owning Activision would hurt competition in either the console or cloud gaming markets. And Corley agreed with Microsoft that the deal could actually make Call of Duty more accessible for players. And one thing that's interesting that Judge Anodin and her decision is she couldn't find a single internal email from Microsoft executives that contradicted that. And she gave Microsoft credit for that. Because in litigation you often find emails that are damaging where people in private are saying something that really contradicts

what the lawyers are saying. Publicly, yeah. I don't think anybody's ever going to read it. Really smart people do this all the time for whatever reason. And the judge said she couldn't find a single email that contradicted this idea. There was no smoking gun where Microsoft said like, oh, yeah, we can't wait to make Call of Duty exclusive. Microsoft said it's grateful for the court's decision and that it's committed to addressing regulators' concerns. It still has a few regulatory hoops to go through in the UK,

but it now has a clearer path to acquiring Activision. It's a huge victory for Microsoft. And for the FTC, it's a huge setback. That's after the break. Summer is like a cocktail. It has to be mixed just right. Start with a handful of great friends. Now, add your favorite music.

And then, finally, add Bacardi Rum. Shake it together. And there you have it. The perfect summer mix. Bacardi. Do what moves you. Live passionately. Drink responsibly.

Copyright 2024. Bacardi, its trade dress and the bat device are trademarks of Bacardi. Do what moves you. Live passionately. Drink responsibly. Copyright 2024. Bacardi. It's trade dress and the bat device are trademarks of Bacardi and Company Limited. Rum 40% alcohol by volume. Wherever you're going, you better believe American Express will be right there with you. Heading for adventure? We'll help you breeze through security. Meeting friends a world away? You can use your travel credit. Squeezing every drop out of the last day? How about a 4 p.m. late checkout? Just need a nice place to settle in? Enjoy your room upgrade.

Wherever you go, we'll go together. That's the powerful backing of American Express. Visit amex.ca slash yamx. Benefits vary by card. Terms apply. Under the Biden administration, the FTC has stepped up scrutiny of big tech firms. Leading the charge is the agency's current director, Lena Kahn. She took the helm in 2021. Lena Kahn is known as a big tech skeptic. She wants to take a more aggressive approach to antitrust enforcement that ensures that big tech companies don't have so much power over

daily lives necessarily and that we're closely monitoring how they use our data, among other things. So I would say that she's an unusually controversial figure for an antitrust enforcer. Antitrust used to be something of a backwater, like who's enforcing antitrust law was not going to be a household name. Lena Kahn, I don't know if she's a household name, but she's certainly got a lot of attention and is controversial. A lot of people in business and tech think she's going too far. A lot of progressives think that she's hitting all the

right notes and that, you know, she's brought a lot of attention to big tech and its enormous power. Yan says Khan has been more likely than her predecessors to go after a particular kind of merger. It's something called a vertical merger. So let's say you're in a scenario where a country has five airlines and two of them are combining. That's a horizontal merger. And let's say you're in a scenario where a country has five airlines and two of them are combining. That's a horizontal merger. And that's sort of a tried and true antitrust concern because it's easy to see how that might raise prices. Sure, because two companies coming together in the same industry makes one bigger company. It's less competition. Exactly. A vertical merger is when it's a combination of companies

that aren't doing the same exact thing, but maybe they're in adjacent fields. So Microsoft Activision vertical merger, it's involving a company that, among other things, makes consoles, for our purposes, let's call it console maker, and then a video game developer. So there's potential synergy there, but they're not doing the same exact thing.

Jan says vertical mergers can be harder for regulators to challenge because the effects on competition and consumers can be less obvious. It's going to be inherently more difficult to challenge a vertical merger because it's just going to be a lot more speculative. If two airlines are combining,

you can just sort of combine their market share and say, well, look, they're going to control a lot more speculative. If two airlines are combining, you can just sort of combine their market share and say, well, look, they're going to control all this, and it's pretty easy to draw a model saying they could raise prices. With a vertical merger, it's always going to be a little more speculative. Does combining a video game maker with a device maker raise prices, or could it actually lower them? It's a little bit more of a battle of the experts laying out all these different scenarios

and a judge might just say, well, I don't know, so I'll let it go through. The case against Microsoft wasn't the first time Khan tried to challenge a vertical merger in tech. Earlier this year, the FTC tried to block another deal. It involved Meta, the company that owns Facebook and Instagram.

There's some parallels here. In that case, the FTC wants to involved Meta, the company that owns Facebook and Instagram. There's some parallels here. In that case, the FTC wants to stop Meta from buying a virtual reality startup, a company that makes like virtual reality fitness games. And the FTC's concern was that it would give Meta a lot of power over the future of virtual reality gaming, a nascent industry that could be very popular one day. And the FTC lost that case. That was a blow to Khan's FTC. Losing the Microsoft case is another. An FTC spokesman suggested that the agency

could soon announce an appeal on the Microsoft case, saying the merger posed a, quote, clear threat to competition. But after these two major losses, Yan says Lina Khan's tough regulatory methods could be in question. I think that a lot of people are going to start debating Lina Khan's legacy soon.

You know, she has taken a much more aggressive approach to antitrust enforcement. And I think the critics are going to say she's losing a lot in court and that shows that she's biased or that her priorities were out of whack. I think her defenders will say the win-loss record in court

is just part of the picture. So I think, you know, you're going to have very different opinions on Lena Kahn's tenure. You know, she was speaking at a conference last year and she said that generally it's OK to not win all your cases as a regulator. She said, I don't expect to have a 100 percent win rate because by losing, sometimes we draw attention to gaps in the law, the limits of antitrust law. And then Congress takes note and maybe they decide to do something about it.

That's all for today, Wednesday, July 12th. The Journal is a co-production of Gimlet and The Wall Street Journal. Additional reporting in this episode by Sarah Needleman and Dave Michaels. Thanks for listening. See you tomorrow.