“This is going to decide whether the deal goes forward,” said Beth Wilkinson, Microsoft’s lead lawyer. She added that a loss could force the company into a “three-year administrative nightmare” that would sink the transaction, which it hopes to close by July 18.
That set the stakes for the hearing in US District Court in San Francisco, where the Federal Trade Commission began laying out its case that Microsoft acquiring Activision – and its popular games like Call of Duty – would be devastating for the video game industry.
The FTC is asking Judge Jacqueline Scott Corley for a preliminary injunction, which would ban Microsoft from completing the deal before the FTC had the chance to argue the case in its internal court.
The clash is broadly seen as a test of whether recent efforts to more aggressively curb the power of tech giants around the world will succeed. Lina Khan, the chair of the FTC, has argued that big tech companies have vast influence over online commerce and communication, allowing them to engage in anticompetitive practices that harm consumers.
“If this deal is completed, the combined company will have and is likely to have the ability and incentive to harm competition in various markets related to consoles, subscription services and cloud,” said James Weingarten, the FTC’s lead lawyer, in court Thursday.
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Weingarten also said Microsoft could make Activision’s games exclusive to its Xbox console or degrade their quality on other platforms to make the Xbox more appealing to gamers. He pointed to Microsoft’s $7.5 billion purchase of ZeniMax Media and its slate of game studios in 2020, after which Microsoft made some of those games exclusive to Xbox. The FTC is also expected to argue that absorbing Activision’s games into Microsoft’s portfolio would give it an unfair edge in the nascent market for cloud gaming.
Microsoft responded that the Activision deal would be good for consumers, expanding their ability to play Activision’s games through low-cost options like Microsoft’s Xbox Game Pass, a subscription service, or through the platforms of other companies like Nintendo and Nvidia, with which it has struck deals.
Wilkinson also argued that it would be nonsensical for Microsoft to remove Call of Duty and other titles from other platforms, such as Sony’s PlayStation, because the company would lose out on a huge chunk of the game’s revenue. She said Sony had become the “complainer-in-chief” in the case and showed an email from Sony’s CEO, Jim Ryan, suggesting that he did not really believe Microsoft would withhold Call of Duty.
The FTC has in another lawsuit accused Meta, Facebook’s parent company, of cutting off nascent competitors when it bought Instagram and WhatsApp. On Wednesday, it sued Amazon over allegations that the company tricked users into signing up for its Prime subscription service. But the FTC has had setbacks: Its challenge to Meta’s purchase of a virtual reality startup fell apart this year after a judge declined to stop the deal from closing.
The FTC initially challenged Microsoft’s bid for Activision using an in-house court. But that court does not have the legal authority to stop the deal. The FTC asked the federal court to step in this month, saying it feared Microsoft would try to complete the deal despite the legal challenges.
The hearing in Corley’s courtroom could be a decisive test for the FTC. If Microsoft wins, it will signal that there are weaknesses in the FTC case and could cause the agency to drop its challenge to the deal. But a win for the FTC could be a sign that its broader challenge has legs, and could put new pressure on Microsoft and Activision to reconsider the multibillion-dollar corporate marriage.
Sony, whose PlayStation console competes against Microsoft’s Xbox, has been a vocal critic of the deal. Sony argues that PlayStation gamers could lose access to Call of Duty – an enormous franchise that has earned more than $30 billion in lifetime revenue – if Microsoft decided to make the game exclusive to Xbox. Microsoft has denied that it would do so.
Although most governments around the world, including the European Union, have approved the acquisition, Microsoft was dealt a setback in April when a British regulatory authority blocked it. That decision is under appeal.
The high-profile list of witnesses expected to testify before Corley over the next week includes Satya Nadella, the CEO of Microsoft; Amy Hood, the company’s chief financial officer; Bobby Kotick, the CEO of Activision; and Phil Spencer, the CEO of Microsoft’s Xbox unit. Ryan will appear via a prerecorded video deposition.
