1a:I[20549,["/_next/static/immutable/chunks/14apx1o_ijcx8.js","/_next/static/immutable/chunks/07q6s6zk2zvaz.js","/_next/static/immutable/chunks/3t2lhm5jgv8nw.js","/_next/static/immutable/chunks/1weteqgvc1_w-.js"],"Conversation"] 1d:I[27201,["/_next/static/immutable/chunks/14apx1o_ijcx8.js"],"IconMark"] 1b:Tb88a,

View in browser

Microsoft Can Acquire Activision, The FTC vs. the Record, The FTC's Failed Vendetta

Wednesday, July 12, 2023

Listen to this Update in your podcast player

Good morning,

The launch of Threads made for a more eventful July 4th week than I expected when I took my summer break, but Stratechery Plus is making up for it in volume: in addition to yesterday’s Article Threads and the Social/Communications Map, we also discussed Threads and Twitter on Dithering and Sharp Tech; I think the latter was particularly useful as we delved into the last 20 years of social media to provide context for this launch.

You can add both podcasts to your podcast player using the links at the bottom of this email.

As a reminder there will not be any Stratechery Interviews for the rest of the summer (they will restart in mid-August), which means there will only be Updates on Monday through Wednesday; this week is an exception as I was traveling on Monday, and will thus post tomorrow as well.

On to the Update.

Microsoft Can Acquire Activision

From the Wall Street Journal:

Microsoft can close its $75 billion acquisition of Activision Blizzard, a federal judge ruled Tuesday, delivering a major setback to the Biden administration’s attempt to rein in big mergers. The deal would combine Microsoft’s Xbox videogaming business with the publisher of popular franchises such as Call of Duty, World of Warcraft and Candy Crush. The ruling means there is no current U.S. obstacle to the two companies merging. The companies are still seeking U.K. merger approval and it wasn’t immediately clear whether the holdup there would delay closing. The bid, however, got a boost Tuesday when Britain’s Competition and Markets Authority said it was prepared to consider new proposals from Microsoft for addressing its competition concerns.

U.S. District Judge Jacqueline Scott Corley said in her opinion that the Federal Trade Commission hadn’t shown that Microsoft’s ownership of Activision games would hurt competition in the console or cloud-gaming markets. “To the contrary, the record evidence points to more consumer access to Call of Duty and other Activision content,” she wrote. The FTC had sought an injunction to prevent the two companies from completing their megadeal before the agency began a separate process to challenge it in August.

Two barriers remain for Microsoft to close the acquisition before a July 18 deadline that would either force the company to pay a $3 billion termination fee to Activision or renegotiate the deal: U.K. approval, and a potential FTC appeal. CNBC reported that “Microsoft and the CMA have agreed on a small divestiture to address the regulator’s concerns”; it’s not clear what that divesture is, but Microsoft and the U.K.’s Competition and Markets Authority (CMA) did jointly ask that their ongoing litigation in front of the U.K.’s Competition Appeal Tribunal be stayed, suggesting a deal is imminent.

As for the FTC, Bloomberg reported that an appeal is coming. This seems completely pointless to me, but then again, so did the original case.

The FTC vs. the Record

I laid out the case for Microsoft’s acquisition of Activision and why it would increase competition in the gaming space in December’s Consoles and Competition. That Article is essential context for understanding this case, so do check it out if you missed it at the time.

In short, there is zero economic incentive for Microsoft to withhold existing Activision titles — specifically Call of Duty — from Sony, which is why it is not a surprise that Microsoft offered to guarantee Call of Duty availability, and also signed deals to make Call of Duty available on Nvidia’s cloud streaming service and the Nintendo Switch console. Rather, the primary incentive for Microsoft’s acquisition was to make Call of Duty and other Activision titles available on Xbox Game Pass, which would both increase availability of Activision titles (and at a significantly lower price), and give Microsoft an avenue to compete with Sony’s dominance via business model innovation. I wrote in the conclusion:

Microsoft is willing to cannibalize itself to build a new business model for video games, and it’s a business model that is pretty darn attractive for consumers. It’s also a business model that Activision wouldn’t pursue on its own, because it has its own profits to protect. Most importantly, though, it’s a business model that is anathema to Sony: making titles broadly available to consumers on a subscription basis is the exact opposite of the company’s exclusives strategy, which is all about locking consumers into Sony’s platform.

A drawing of Sony's PS4 Exclusive Strategy

Here’s the thing: isn’t this a textbook example of competition? The FTC is seeking to preserve a model of competition that was last relevant in the PS2/Xbox generation, but that plane of competition has long since disappeared. The console market as it is today is one that is increasingly boring for consumers, precisely because Sony has won. What is compelling about Microsoft’s approach is that they are making a bet that offering consumers a better deal is the best way to break up Sony’s dominance, and this is somehow a bad thing?

Judge Corley overwhelmingly agreed with this view. First, her decision demolished the FTC’s argument that Microsoft’s goal was to foreclose Call of Duty availability on PlayStation, not only citing the deals Microsoft signed to increase availability, Microsoft’s past behavior with Minecraft, and the unanswered-by-the-FTC destruction of their economic expert’s testimony, but also noting that:

There are no internal documents, emails, or chats contradicting Microsoft’s stated intent not to make Call of Duty exclusive to Xbox consoles. Despite the completion of extensive discovery in the FTC administrative proceeding, including production of nearly 1 million documents and 30 depositions, the FTC has not identified a single document which contradicts Microsoft’s publicly-stated commitment to make Call of Duty available on PlayStation (and Nintendo Switch).

The judge also highlighted Activision’s incentives as a standalone company:

Activision does not allow, and has no plans to allow, its games in multigame subscription libraries upon release. (See Dkt. No. 285, 6/28/23 Tr. (Kotick), at 731:12- 14 (“In our current long-range plan, we don’t have any revenues that are being generated from a multigame subscription service”); Dkt. No. 285, 6/28/23 Tr. (Kotick) at 746:19-21 (“I would say it’s just not something that we do have any plans to do or have ever done . . . .”). This “philosophical aversion” to subscription services arises from concerns that multigame subscriptions would “degrade the economics” of Activision’s buy-to-play business model, are “inconsistent with the idea of starting out with free-to-play as the way that you build game universes and franchises,” and possibly could lead to substantial cannibalization. (Dkt. No. 285, 6/28/23 Tr. (Kotick) at 729:3-16, 743:22-24; see also id. at 744:8-11 (explaining “cannibalization would play a role” in a decision not to place games in a multigame subscription).)

Judge Corley pointed out that the FTC’s argument presumed the opposite:

The FTC’s primary argument appears to be that even without the merger, Activision will contract to put its content, including Call of Duty, on subscription services. The record evidence is to the contrary. Activision believes it is not in its financial interest to do so because it would cannibalize individual sales. (Dkt. No. 285, 6/28/23 Tr. (Kotick) at 744:10-11.) Kotick cannot imagine a subscription service agreeing to the financial terms Activision would require to make it a financial win for Activision. (Id. at 752:17-19, 752:8-11.)

This is just one of several examples where the FTC made bald assertions about what Microsoft and/or Activision would do that not only didn’t make sense, but which were flatly refuted in the record.

The FTC’s Failed Vendetta

This leads to what I thought was the most damning part of Judge Corley’s opinion:

As a threshold matter, the FTC contends it need only show the transaction is “likely to increase the ability and/or incentive of the merged firm to foreclose rivals.” (Dkt. No. 291-2, FTC’s Findings and Conclusions at p. 181 ¶ 90.) For support, it cites its own March 2023 decision in Illumina, 2023 WL 2823393, at *33. Illumina reasons:

[t]o harm competition, a merger need only create or augment either the combined firm’s ability or its incentive to harm competition. It need not do both. Requiring a plaintiff to show an increase to both the ability and the incentive to foreclose would per se exempt from the Clayton Act’s purview any transaction that involves the acquisition of a monopoly provider of inputs to adjacent markets.

2023 WL 2823393, at *38 (cleaned up) (emphasis added). Illumina, however, provides no authority for this proposition, nor could it. Under Section 7, the government must show a “reasonable probability of anticompetitive effect.” Warner, 742 F.2d at 1160 (emphasis added). If there is no incentive to foreclose, then there is no probability of foreclosure and the alleged concomitant anticompetitive effect. Likewise, if there is no ability, then a party’s incentive to foreclose is irrelevant. Indeed, the FTC’s expert, Dr. Lee, analyzed the anticompetitive effects of the merger based on ability and incentive. (Dkt. No. 226-2, Lee Decl. at ¶ 87 (“I evaluate whether the Merged Entity would have the ability and economic incentive to foreclose Microsoft’s rivals from Activision content in the two Consoles Markets”).

The FTC also appears to contend it need only show the combined firm would have a greater ability and incentive to foreclose Call of Duty from its rivals than an independent Activision. (Dkt. No. 291-2, FTC’s Findings and Conclusions at p. 181 ¶ 90.) This assertion, however, ignores the text of Section 7 which forbids mergers which may “substantially . . . lessen competition.” 15 U.S.C. § 18. It is not enough that a merger might lessen competition — the FTC must show the merger will probably substantially lessen competition. That the combined firm has more of an incentive than an independent Activision says nothing about whether the combination will “substantially” lessen competition. See UnitedHealth Grp., 630 F. Supp. 3d at 133 (“By requiring that [the defendant] prove that the divestiture would preserve exactly the same level of competition that existed before the merger, the Government’s proposed standard would effectively erase the word ‘substantially’ from Section 7”).

Thus, to establish a likelihood of success on its ability and incentive foreclosure theory, the FTC must show the combined firm (1) has the ability to withhold Call of Duty, (2) has the incentive to withhold Call of Duty from its rivals, and (3) competition would probably be substantially lessened as a result of the withholding.

Illumina is a biotech company that acquired Grail, a maker of cancer diagnostic tests; the FTC challenged the acquisition in its internal court and lost in 2022; then, earlier this year, after an internal appeal, the FTC required Illumina to divest Grail anyways. The case is currently in federal court.

I don’t, to be clear, have any view of the Illumina-Grail case; I only bring it up to highlight the fact that the FTC’s justification for its insistence that it can completely ignore the economic reality of Microsoft’s Activision acquisition, is rooted in its own argument in a case that it has already lost once in its internal court, and which has yet to be decided in federal court. That’s how poor this case is: the only precedent the FTC can manage to find for its belief that it ought to be able to block acquisitions based on theory, with no consideration of the facts on the ground or the record it has compiled, is its own as yet unchallenged opinion in a case it may very well lose.

This certainly strengthens the final paragraph in the aforementioned Article about Consoles and Competition:

For the record, I do believe this acquisition demands careful overview, and it’s completely appropriate to insist that Microsoft continue to deliver Activision titles to other platforms, even if it wouldn’t make economic sense to do anything but. It’s increasingly difficult, though, to grasp any sort of coherent theory to the FTC’s antitrust decisions beyond ‘big tech bad’. There are real antitrust issues in the industry, but that requires actually understanding the industry to tease them out; that sort of understanding applied to this case would highlight Sony’s actual dominance and that having multiple compelling platforms with different business models is the essence of competition.

There is a nuanced argument to be had about whether or not antitrust laws written in an age of railroads and steel is useful in an age of Aggregators; my belief is that we need new laws, because dominance in a world of abundance, which is predicated on controlling demand, is very different than dominance in a world of scarcity, which is predicated on controlling supply. The current FTC, though, seems to have very little time for nuance, much less facts: if a big tech company makes an acquisition, it is ipso facto bad, no facts required.

I don’t think this will end well for the FTC; for the past several years — extending, I would argue, back into the Trump administration — there has been a chill on big company acquisitions, because nobody wants a legal battle. The FTC’s cases, though, are so kneejerk, and so poorly argued, that it’s very possible that big companies will in fact be emboldened. It is, I would grant, problematic to have a regulator that is too permissive; it’s worse, though, to have one that is so ideological that every opinion against it is embarrassing in the totality of its dismissiveness.

This Update will be available as a podcast later today. To receive it in your podcast player, visit Stratechery.

The Stratechery Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.

Thanks for being a subscriber, and have a great day!

Listen to this update and other Stratechery Plus content in your podcast player:
Stratechery | Sharp Tech | Dithering | Sharp China | GOAT

Subscription Information

Member: Nicolas Rocha
Email: nrocha22@gmail.com
Member since: May 13, 2020
Your subscription renews every month
Renewal date: July 13, 2023

You are receiving this email because you are subscribed to Stratechery.

Click here to view your account and manage your subscriptions.

© 2023 Stratechery LLC, 2093 Philadelphia Pike #9930, Claymont DE 19703

12:[["$","$L1a",null,{"thread":{"token":"8QYXUICkCHwfWaIuhtIeSh","subject":"Microsoft Can Acquire Activision, The FTC vs. the Record, The FTC's Failed Vendetta (Stratechery Update 7-12-2023)","messages":[{"id":"189495ad21618d8e","internalDate":1689152835000,"from":{"emailAddress":"email@stratechery.com","name":"Ben Thompson"},"to":[{"emailAddress":"nrocha22@gmail.com","name":"Nicolas Rocha"}],"cc":[],"bcc":[],"attachments":[],"html":"$1b","snippet":"Microsoft didn't just win its case against the FTC: the totality of its victory calls into question the FTC's legitimacy, and may lead to more acquisitions in the future. View in browser"}],"sharer":{"displayName":"Nicolas R","email":"nrocha22@gmail.com","userKey":"agxzfm1haWxmb29nYWVyNQsSDE9yZ2FuaXphdGlvbiISbnJvY2hhMjJAZ21haWwuY29tDAsSBFVzZXIYgICAgICAgAoM","googleProfilePhotoUrl":"https://lh3.googleusercontent.com/a/ACg8ocKg7hWWoHpZpIrahWeeYgg6IpdGZgyFPFFkVY7p41ftqn3z6of1hQ=s96-c"},"participantCount":2}}],"$L1c"] 15:null 19:[["$","title","0",{"children":"Microsoft Can Acquire Activision, The FTC vs. the Record, The FTC's Failed Vendetta (Stratechery Update 7-12-2023) - Streak Share"}],["$","meta","1",{"name":"description","content":"Microsoft didn't just win its case against the FTC: the totality of its victory calls into question the FTC's legitimacy, and may lead to more acquisitions in the future. View in browser"}],["$","meta","2",{"name":"robots","content":"noindex, nofollow, noarchive"}],["$","link","3",{"rel":"canonical","href":"https://share.streak.com/8QYXUICkCHwfWaIuhtIeSh"}],["$","meta","4",{"property":"og:title","content":"Microsoft Can Acquire Activision, The FTC vs. the Record, The FTC's Failed Vendetta (Stratechery Update 7-12-2023)"}],["$","meta","5",{"property":"og:description","content":"Microsoft didn't just win its case against the FTC: the totality of its victory calls into question the FTC's legitimacy, and may lead to more acquisitions in the future. View in browser"}],["$","meta","6",{"property":"og:url","content":"https://share.streak.com/8QYXUICkCHwfWaIuhtIeSh"}],["$","meta","7",{"property":"og:site_name","content":"Streak Share"}],["$","meta","8",{"property":"og:image","content":"https://streak-share.imgix.net/frame.png?blend64=aHR0cHM6Ly9saDMuZ29vZ2xldXNlcmNvbnRlbnQuY29tL2EvQUNnOG9jS2c3aFdXb0hwWnBJcmFoV2VlWWdnNklwZEdaZ3lGUEZGa1ZZN3A0MWZ0cW4zejZvZjFoUT1zMjM5LWM%3D&blend-mode=normal&blend-x=194&blend-y=184&blend-h=239&blend-w=239&mark64=aHR0cHM6Ly9zdHJlYWstc2hhcmUuaW1naXgubmV0L2ZyYW1lLnBuZw%3D%3D&mark-x=0&mark-y=0"}],["$","meta","9",{"property":"og:type","content":"website"}],["$","meta","10",{"name":"twitter:card","content":"summary"}],["$","meta","11",{"name":"twitter:title","content":"Microsoft Can Acquire Activision, The FTC vs. the Record, The FTC's Failed Vendetta (Stratechery Update 7-12-2023)"}],["$","meta","12",{"name":"twitter:description","content":"Microsoft didn't just win its case against the FTC: the totality of its victory calls into question the FTC's legitimacy, and may lead to more acquisitions in the future. View in browser"}],["$","meta","13",{"name":"twitter:image","content":"https://streak-share.imgix.net/frame.png?blend64=aHR0cHM6Ly9saDMuZ29vZ2xldXNlcmNvbnRlbnQuY29tL2EvQUNnOG9jS2c3aFdXb0hwWnBJcmFoV2VlWWdnNklwZEdaZ3lGUEZGa1ZZN3A0MWZ0cW4zejZvZjFoUT1zMjM5LWM%3D&blend-mode=normal&blend-x=194&blend-y=184&blend-h=239&blend-w=239&mark64=aHR0cHM6Ly9zdHJlYWstc2hhcmUuaW1naXgubmV0L2ZyYW1lLnBuZw%3D%3D&mark-x=0&mark-y=0"}],["$","link","14",{"rel":"icon","href":"/favicon.png"}],["$","$L1d","15",{}]]

Microsoft Can Acquire Activision, The FTC vs. the Record, The FTC's Failed Vendetta (Stratechery Update 7-12-2023)

Ben Thompson<email@stratechery.com>Jul 12, 2023, 9:07 AM