FTC Sues to Block Microsoft’s Acquisition of Activision Blizzard

The law enforcement agency said the deal is illegal because it would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games. The company could raise prices for people who don’t use Microsoft’s hardware to access the games, or even cut off access entirely, the FTC said.

“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 statement. “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.”

Microsoft said it continues to believe the deal, which it values at $68.7 billion after adjusting for Activision’s net cash, would expand competition and signaled it plans to litigate with the federal agency.

“We have been committed since Day One to addressing competition concerns, including by offering earlier this week proposed concessions to the FTC,”

Brad Smith,

Microsoft vice chair and president, said. “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.”

In its complaint, the FTC said Microsoft previously suppressed competition from rivals through its 2021 acquisition of ZeniMax Media Inc., the owner of game developer Bethesda Softworks. The agency said Microsoft made several of Bethesda’s games, including “Starfield” and “Redfall,” exclusive to its own platforms, despite giving assurances to European antitrust authorities that it would do otherwise.

The commission vote was three to one in favor of authorizing the suit, with Republican Commissioner Christine S. Wilson voting against it. The FTC filed the case in its administrative court because it didn’t need an emergency federal court order to stop the deal from closing. Microsoft and Activision can’t wrap up the transaction because it is still being reviewed by European competition authorities.

The merger agreement between the companies says the deal can be extended until July. The FTC’s staff is authorized to go to federal court to seek an injunction preventing the closing if the companies seek to finish the deal before the administrative law process is complete, according to an FTC official.

“This is a somewhat meaningful setback for Microsoft,” Stifel Nicolaus analyst Brad Reback said. “Over the last two decades they’ve worked very hard to stay on the right side of government agencies.” Mr. Reback added that if Microsoft litigates and loses, the company could become limited in its ability to do large deals in the future.

Microsoft’s deal for Activision, which would be its biggest-ever acquisition, is also under investigation by antitrust regulators in the U.K and the European Union. The companies first announced their merger agreement in January and said they expected the deal to close in June 2023.

Microsoft makes Xbox videogame consoles and competes against

Sony Group Corp.

and

Nintendo Co.

, which are known for their PlayStation and Switch consoles, respectively. All three companies also develop and publish their own games.

Antitrust experts initially expected the deal would clear government scrutiny. But allegations that workplace misconduct was rampant in the past at Activision created trouble for the company in Washington—including with progressive senators who called on the FTC to thoroughly investigate the deal, along with its potential impact on workers.

The SEC has been separately investigating Activision Chief Executive

Bobby Kotick

and other executives over how they handled and disclosed the allegations, The Wall Street Journal has reported, citing documents and people familiar with the investigation. Activision has said it is working to become “the videogame industry’s most welcoming and inclusive workplace.”

“The allegation that this deal is anti-competitive doesn’t align with the facts, and we believe we’ll win this challenge,” Mr. Kotick said in a letter to employees posted on Activision’s website.

Microsoft’s shares closed up about 1%, while Activision’s shares were down by about 1.5%.

The combined company would control about 11% of the global digital game publication business, according to Bloomberg Intelligence analysts.

The FTC initiated a review of the Activision deal in February, the Journal reported at the time. Since assuming office in 2021, Chairwoman Lina Khan has moved to investigate more mergers, particularly those involving the largest technology companies.

Ms. Khan and other so-called progressive antitrust enforcers say competition law hasn’t kept up with the evolution of the digital economy. Antitrust law historically focuses on whether mergers that combine competitors—resulting in greater market concentration—would likely drive up prices for consumers. Under the Biden administration, appointees such as Ms. Khan have pushed for focusing less on price effects and examining more vertical mergers, in which companies acquire key suppliers or partners and integrate those firms into their operations.

Backers of the status quo say the courts have correctly focused on objective criteria such as price levels, reduced output or diminished opportunities for innovation. Vertical deals were historically thought to result in lower prices because companies could better control their input costs.

Vertical deals are harder for the government to block, said Jennifer Rie, a senior litigation analyst at Bloomberg Intelligence. The lawsuit will also be hard for the FTC to win because enforcers will have to show that withholding “Call of Duty” or similar games would be profitable for Microsoft, which pledged to allow rivals to continue accessing that blockbuster game.

Ms. Khan “is trying hard to develop case law that pushes things in a different direction than they have been going in the past 30 years, in which has been more and more difficult to challenge mergers,” Ms. Rie said. “This suit falls right into her wheelhouse in terms of what she’s trying to do.”

They have also gone after deals that don’t fit easily into the horizontal or vertical categories. Ms. Khan’s agency this year challenged

Meta Platforms Inc.’s

deal for a virtual-reality exercise game developer, Within Unlimited Inc. Meta doesn’t have its own VR fitness game, but makes one of the most popular VR headsets and has an app store through which consumers purchase VR apps. The FTC’s litigation over that kicked off Thursday in federal court in San Jose, Calif.

Sony has been the loudest of the critics of the planned Activision deal, arguing that it could hurt competition if Microsoft restricts access to Activision games, especially “Call of Duty,” due to the franchise’s exceptional popularity. The FTC’s lawsuit defines one of the markets that might be impacted as games played on “high-performance consoles,” which it defines as just Microsoft’s Xbox and Sony’s PlayStation. Microsoft doesn’t disclose Xbox sales but has said it would still be the third-largest videogame console maker after Sony and Nintendo after merging with Activision.

Microsoft has repeatedly said it doesn’t plan to deny Sony and others access to Activision games and that its deal for the company wouldn’t hurt competition. The company has publicly pledged to give Sony and Nintendo access to new “Call of Duty” games on their respective current hardware the same day they launch on Xbox consoles for the next 10 years.

The FTC’s complaint, however, points out that Activision’s library of games includes more hits than just “Call of Duty” and that consoles may not play as big a role in the future of videogaming as they do today. New technologies and the growing popularity of subscriptions could meaningfully change that landscape, the agency said.

Microsoft is one of the world’s largest cloud-computing service providers and has been a leader in the cloud-gaming market through its Game Pass subscription service. Sony offers cloud gaming through its PlayStation Plus subscription. Cloud gaming makes it possible for people to play games on just about any internet-connected device. Though the technology is in its infancy, industry analysts and executives have said it could one day make consoles obsolete.

Progressive groups have put pressure on the FTC to block the deal, saying it would create industry stovepipes in which technology companies own lucrative content and user data, and have the ability to make money from advertising as well.

“Microsoft’s recent promises not to abuse that power by making preemptive concessions to Sony and Nintendo reinforce the underlying illegality of the original deal,” the American Economic Liberties Project’s Sarah Miller said in a statement.

“The FTC showed its cards,” Wedbush Securities analyst Michael Pachter said. “Microsoft can address all of the FTC’s concerns and the case becomes moot.”

Write to Sarah E. Needleman at [email protected] and Dave Michaels at [email protected]

The law enforcement agency said the deal is illegal because it would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games. The company could raise prices for people who don’t use Microsoft’s hardware to access the games, or even cut off access entirely, the FTC said.

“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 statement. “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.”

Microsoft said it continues to believe the deal, which it values at $68.7 billion after adjusting for Activision’s net cash, would expand competition and signaled it plans to litigate with the federal agency.

“We have been committed since Day One to addressing competition concerns, including by offering earlier this week proposed concessions to the FTC,”

Brad Smith,

Microsoft vice chair and president, said. “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.”

In its complaint, the FTC said Microsoft previously suppressed competition from rivals through its 2021 acquisition of ZeniMax Media Inc., the owner of game developer Bethesda Softworks. The agency said Microsoft made several of Bethesda’s games, including “Starfield” and “Redfall,” exclusive to its own platforms, despite giving assurances to European antitrust authorities that it would do otherwise.

The commission vote was three to one in favor of authorizing the suit, with Republican Commissioner Christine S. Wilson voting against it. The FTC filed the case in its administrative court because it didn’t need an emergency federal court order to stop the deal from closing. Microsoft and Activision can’t wrap up the transaction because it is still being reviewed by European competition authorities.

The merger agreement between the companies says the deal can be extended until July. The FTC’s staff is authorized to go to federal court to seek an injunction preventing the closing if the companies seek to finish the deal before the administrative law process is complete, according to an FTC official.

“This is a somewhat meaningful setback for Microsoft,” Stifel Nicolaus analyst Brad Reback said. “Over the last two decades they’ve worked very hard to stay on the right side of government agencies.” Mr. Reback added that if Microsoft litigates and loses, the company could become limited in its ability to do large deals in the future.

Microsoft’s deal for Activision, which would be its biggest-ever acquisition, is also under investigation by antitrust regulators in the U.K and the European Union. The companies first announced their merger agreement in January and said they expected the deal to close in June 2023.

Microsoft makes Xbox videogame consoles and competes against

Sony Group Corp.

and

Nintendo Co.

, which are known for their PlayStation and Switch consoles, respectively. All three companies also develop and publish their own games.

Antitrust experts initially expected the deal would clear government scrutiny. But allegations that workplace misconduct was rampant in the past at Activision created trouble for the company in Washington—including with progressive senators who called on the FTC to thoroughly investigate the deal, along with its potential impact on workers.

The SEC has been separately investigating Activision Chief Executive

Bobby Kotick

and other executives over how they handled and disclosed the allegations, The Wall Street Journal has reported, citing documents and people familiar with the investigation. Activision has said it is working to become “the videogame industry’s most welcoming and inclusive workplace.”

“The allegation that this deal is anti-competitive doesn’t align with the facts, and we believe we’ll win this challenge,” Mr. Kotick said in a letter to employees posted on Activision’s website.

Microsoft’s shares closed up about 1%, while Activision’s shares were down by about 1.5%.

The combined company would control about 11% of the global digital game publication business, according to Bloomberg Intelligence analysts.

The FTC initiated a review of the Activision deal in February, the Journal reported at the time. Since assuming office in 2021, Chairwoman Lina Khan has moved to investigate more mergers, particularly those involving the largest technology companies.

Ms. Khan and other so-called progressive antitrust enforcers say competition law hasn’t kept up with the evolution of the digital economy. Antitrust law historically focuses on whether mergers that combine competitors—resulting in greater market concentration—would likely drive up prices for consumers. Under the Biden administration, appointees such as Ms. Khan have pushed for focusing less on price effects and examining more vertical mergers, in which companies acquire key suppliers or partners and integrate those firms into their operations.

Backers of the status quo say the courts have correctly focused on objective criteria such as price levels, reduced output or diminished opportunities for innovation. Vertical deals were historically thought to result in lower prices because companies could better control their input costs.

Vertical deals are harder for the government to block, said Jennifer Rie, a senior litigation analyst at Bloomberg Intelligence. The lawsuit will also be hard for the FTC to win because enforcers will have to show that withholding “Call of Duty” or similar games would be profitable for Microsoft, which pledged to allow rivals to continue accessing that blockbuster game.

Ms. Khan “is trying hard to develop case law that pushes things in a different direction than they have been going in the past 30 years, in which has been more and more difficult to challenge mergers,” Ms. Rie said. “This suit falls right into her wheelhouse in terms of what she’s trying to do.”

They have also gone after deals that don’t fit easily into the horizontal or vertical categories. Ms. Khan’s agency this year challenged

Meta Platforms Inc.’s

deal for a virtual-reality exercise game developer, Within Unlimited Inc. Meta doesn’t have its own VR fitness game, but makes one of the most popular VR headsets and has an app store through which consumers purchase VR apps. The FTC’s litigation over that kicked off Thursday in federal court in San Jose, Calif.

Sony has been the loudest of the critics of the planned Activision deal, arguing that it could hurt competition if Microsoft restricts access to Activision games, especially “Call of Duty,” due to the franchise’s exceptional popularity. The FTC’s lawsuit defines one of the markets that might be impacted as games played on “high-performance consoles,” which it defines as just Microsoft’s Xbox and Sony’s PlayStation. Microsoft doesn’t disclose Xbox sales but has said it would still be the third-largest videogame console maker after Sony and Nintendo after merging with Activision.

Microsoft has repeatedly said it doesn’t plan to deny Sony and others access to Activision games and that its deal for the company wouldn’t hurt competition. The company has publicly pledged to give Sony and Nintendo access to new “Call of Duty” games on their respective current hardware the same day they launch on Xbox consoles for the next 10 years.

The FTC’s complaint, however, points out that Activision’s library of games includes more hits than just “Call of Duty” and that consoles may not play as big a role in the future of videogaming as they do today. New technologies and the growing popularity of subscriptions could meaningfully change that landscape, the agency said.

Microsoft is one of the world’s largest cloud-computing service providers and has been a leader in the cloud-gaming market through its Game Pass subscription service. Sony offers cloud gaming through its PlayStation Plus subscription. Cloud gaming makes it possible for people to play games on just about any internet-connected device. Though the technology is in its infancy, industry analysts and executives have said it could one day make consoles obsolete.

Progressive groups have put pressure on the FTC to block the deal, saying it would create industry stovepipes in which technology companies own lucrative content and user data, and have the ability to make money from advertising as well.

“Microsoft’s recent promises not to abuse that power by making preemptive concessions to Sony and Nintendo reinforce the underlying illegality of the original deal,” the American Economic Liberties Project’s Sarah Miller said in a statement.

“The FTC showed its cards,” Wedbush Securities analyst Michael Pachter said. “Microsoft can address all of the FTC’s concerns and the case becomes moot.”

Write to Sarah E. Needleman at [email protected] and Dave Michaels at [email protected]