February 9, 2023

Lina Khan, the head of the Federal Trade Commission, has promised to usher in a new era of antitrust against America’s corporate giants, saying recently that the agency plans to “enforce antitrust laws to ensure maximum effectiveness.”

Now, Ms. Khan has staked that ambitious agenda on a case that could prove extremely challenging for the agency to win.

The FTC filed a lawsuit Thursday seeking to block Microsoft’s $69 billion acquisition of video game publisher Activision, the largest consumer technology deal in 20 years. The action underscores Ms. Khan’s statement about reining in corporate power and is the boldest in a string of recent lawsuits the agency has brought to block other, smaller deals in the name of competition.

But experts say Ms. Khan and the FTC face obstacles in trying to block the Microsoft-Activision deal. That’s because courts have been skeptical of challenges to so-called vertical mergers, in which two businesses don’t directly compete. In this case, Microsoft is best known in gaming as maker of the Xbox console, while Activision Blizzard is a major publisher of blockbusters like Call of Duty.

In addition, Microsoft has made some concessions to reduce regulators’ concerns about buying Activision — such as the promise that Call of Duty will be available on Sony’s PlayStation and Nintendo’s platforms, not just the Xbox — some judges may think. This is convincing.

“This is certainly a challenging lawsuit for the committee because vertical challenges are usually an uphill battle,” said Bill Bell, who led the Justice Department’s antitrust division during the Obama administration and represented Sony in private practice .

The case is becoming a test of Ms. Khan’s belief that the FTC must more aggressively examine the power of corporate giants in the modern economy, including the largest technology companies. Appointed by President Biden to head the agency, she has said she wants to take more cases to the courts — rather than settling with companies — to push the boundaries of antitrust law, a return not seen since the last century conduct that breaches trust.

Since Ms. Khan took over the FTC last June, the agency has used novel or little-known arguments to challenge deals. It sued to block a merger between chipmakers Nvidia and Arm, another deal in which the companies are not direct competitors. In July, the agency sued to block Facebook parent Meta’s acquisition of virtual reality startup Within, a case that rests on the rare argument that the deal would hurt competition in an underdeveloped market.

Microsoft has vowed to fight the FTC’s lawsuit over the Activision acquisition. On Thursday, Microsoft President Brad Smith said the company was “confident in our case and welcomes the opportunity to present it in court.” On Friday, Microsoft cited previous statements that it believed the deal would expand competition And create more opportunities for gamers and game developers.

An FTC spokesman declined to comment on the case.

Regulators have traditionally focused on challenging mergers that combine two direct competitors. When they litigate vertical mergers, they had a mixed record.

The biggest and fiercest recent battle over a vertical merger took place in 2017, when the Justice Department tried to block AT&T’s $85.4 billion takeover of Time Warner. A federal judge ultimately approved the deal, saying he did not believe the merger would harm competition in the telecommunications and media sectors.

This year, a judge rejected the FTC’s attempt to block a gene-sequencing company’s acquisition of a maker of cancer blood tests, saying the evidence did not show the gene-sequencing company would have an incentive to harm a competitor’s blood-test product if it acquired it.

But Ms. Khan, along with her colleagues at the Justice Department, has spearheaded an effort to rewrite guidelines for evaluating such deals.

The FTC’s rationale for opposing Microsoft’s deal with Activision is largely based on the fact that Xbox and PlayStation consoles compete in a league of their own, rather than other video game devices like the Nintendo Switch. Barry Nigro, who worked in the Justice Department’s antitrust division during the Obama administration, said courts give serious consideration to whether that definition is correct when deciding cases.

In the complaint, the FTC argues that the games Activision makes are “extremely important” to the success of the video game console, so Microsoft would have the ability and incentive to use its control over those games to block competitors or lower the quality of the games.

No game was more important to the case than the first-person shooter Call of Duty, which the agency called “one of the most successful console game franchises of all time.” Sony has said that if Microsoft gets hold of Call of Duty, it could move the game away from the PlayStation, pushing players toward the Xbox.

Microsoft has repeatedly said it doesn’t make sense to pull Call of Duty from the PlayStation platform where most gamers play it. This week, Microsoft signed a 10-year deal to bring games to Nintendo’s Switch, and said it offered Sony a similar arrangement.

But the FTC dismissed Microsoft’s pledge. It pointed to Microsoft’s $7.5 billion deal last year to acquire ZeniMax, the parent company of eight game studios behind hit titles like The Elder Scrolls, Doom and Fallout.

In its complaint, the agency wrote that Microsoft had “assured” European regulators who were reviewing the ZeniMax deal that Microsoft would not have an incentive to reject ZeniMax games for rival consoles. But Microsoft later announced that ZeniMax Studios’ major new game would be released only on its Xbox and Windows computers.

In its lawsuit, the agency said this should “cast more doubt” on Microsoft’s claims about keeping Call of Duty on PlayStation.

Microsoft says these new ZeniMax games can’t hold a candle to existing franchises like Call of Duty. It shows that the FTC misrepresented what happened because the company failed to commit to the European Commission, direction The European filing says it will decide how to release games on a “case by case” basis.

In Wednesday’s meeting with the agency and commissioners, Microsoft offered to make an enforceable, binding commitment to keep Call of Duty on PlayStation, a person with direct knowledge of the conversation said. But commissioners appeared uninterested in accepting the settlement, the person said.

The FTC declined to comment on conversations with Microsoft ahead of the lawsuit.

These types of agreements have fallen out of favor with regulators like Ms Khan. She has said that promises companies make to regulators are rarely enforced and do not address the core issue of companies getting big and wielding their power to affect competition.

In some recent antitrust cases, judges have cited the settlement proposals as grounds for allowing mergers despite regulators’ objections. “The courts have been surprisingly enthusiastic about the kind of thing Microsoft is offering here,” said Daniel Francis, an assistant professor of law at New York University and a former FTC official.

The FTC complaint says the first hearing in the case will be held in August.

Karen Browning Contribution report.

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