On July 10, 2023, the United States District Court for the Northern District of California denied the Federal Trade Commission's ("FTC") request for a preliminary injunction against Microsoft's proposed nearly $69 billion acquisition of Activision Blizzard. Activision produces some of the most iconic video game titles, including Call of Duty, World of Warcraft, Diablo, and Candy Crush (for mobile devices). The Court held the FTC had not shown a likelihood of success that the combined firm would "probably pull Call of Duty from Sony PlayStation, or that its ownership of Activision content will substantially lessen competition in the video game library subscription and cloud gaming markets." This decision at least clears a big hurdle for Microsoft and could be a big win for consumers who own the Xbox game console, especially those who subscribe to Microsoft's paid game library subscription, Game Pass. Here are six things companies can learn from this decision.
1. Narrowly defined competition markets may withstand an antitrust challenge
The first step in analyzing an antitrust challenge is determining the relevant market. The Court determined that the FTC met its burden in establishing the relevant markets are (1) high-performance consoles (Xbox and Sony PlayStation, and excludes PC and Nintendo Switch); (2) multigame content library subscription services; and (3) cloud gaming. The FTC insisted that the PC and Nintendo Switch are not part of the relevant market based on price, performance, and content, making them improper substitutes. The Court noted that the products need not be fully interchangeable to constitute a substitute but reasonably interchangeable, so there is a cross-elasticity of demand. The key question gleaned from this decision is whether substitutes were likely to materialize sufficiently soon that would restrict a monopolist's ability, for example, to raise prices.
2. Proactive commitments to maintain or expand competition strongly indicate a lack of intent to substantially lessen competition in the relevant markets
The Court found compelling that Microsoft made or offered several commitments to its competitors that are inconsistent with an intent to foreclose on competition. For example, immediately upon the merger's announcement, Microsoft committed to maintain Call of Duty on its existing platforms and even expand its availability by extending Activision's obligation to ship Call of Duty at parity on PlayStation. Microsoft also contacted its competitor, Valve, which runs the leading PC game store, Steam, committing to make Call of Duty available on Steam for ten years. Further, Microsoft took steps to expand Call of Duty to non-Microsoft platforms, such as the Nintendo Switch. Sony and Nintendo did not doubt the sincerity of Microsoft's efforts, and no internal documents, emails, or chats contradict Microsoft's stated intent not to make Call of Duty exclusive to Xbox consoles. Therefore, the FTC did not raise serious questions regarding whether the proposed merger was likely to substantially lessen competition in the console market.
3. A likelihood of a combined firm's ability or its incentive to harm competition is insufficient
The Court did not find the FTC's argument persuasive that it need only show that a combined firm would have a greater ability and incentive to foreclose Call of Duty from its rivals than an independent Activision. The Court held it is not enough that a merger might lessen competition; the FTC must show the merger will probably substantially lessen competition. It reasoned that the combined firm has more of an incentive than an independent Activision, saying nothing about whether the combination will "substantially" lessen competition.
4. Partial foreclosure on competition is insufficient
The FTC alluded to the possibility of partial foreclosure, which might involve releasing Call of Duty later on PlayStation than Xbox or having a Call of Duty Christmas character in the Xbox version, but not the PlayStation version—alternatively, degrading the player's experience on one console versus another. However, the Court was unpersuaded, reasoning that there is insufficient evidence that a developer would intentionally develop a subpar game for one platform versus another, nor an incentive for Microsoft to do so. On the contrary, Microsoft stated that such action would cause reputational damage to the company.
5. Making a product exclusively available on one subscription service and not rival subscription services does not seriously call into question whether such exclusivity will substantially lessen competition in the subscription services market
While Call of Duty is not and has never been offered on a multigame library subscription service, the Court was unpersuaded that doing so in the future would substantially lessen competition. On the contrary, the pro-competitive effect of expanding access to Call of Duty by adding it to Microsoft's multigame library subscription service, Game Pass, gives consumers a new, lower-cost way to play the game. While it is unlikely that Microsoft would license Call of Duty to rival subscription gaming services, the Court also noted that the evidence showed Activision had no financial interest in doing so.
6. Proactively enhancing or creating competition support pro-competitive efforts
The Court found that the FTC failed to show a likelihood of success in its claim the merger will probably lessen competition in the cloud gaming market because the combined firm will foreclose Activision's content, including Call of Duty, from cloud gaming competitors. However, the evidence showed that Microsoft entered into agreements with five cloud streaming providers, which did not previously have access to Activision's content on cloud streaming services. This will, for the first time, allow several of Microsoft's cloud streaming competitors to access Activision content. Thus, the merger will enhance, and not lessen, competition in the cloud streaming market.
The above lessons are not exhaustive. To learn more, please consult with a member of the Ropers Majeski Business & Commercial Litigation, Corporate & Business Transactions, and Intellectual Property teams.