Microsoft’s Jan. 18 announcement that it intends to purchase Activision Blizzard for $68.7 billion—which would mark the highest dollar amount ever paid by a tech company for an acquisition—has rocked the video game and esports industries. The massive dollar figure, coupled with concerns about diminished competition, invites legal questions about whether the deal will satisfy U.S. regulators.
Odds are it will.
Activision Blizzard publishes Call of Duty, Overwatch and other popular games with associated esports platforms. The company has been ranked the fifth largest publisher in North America and, according to Statista, possesses the largest share of the worldwide esports market. Microsoft absorbing Activision Blizzard would be viewed as a “vertical merger,” meaning the blending of two companies that provide different services in the same production chain. In contrast, when two rivals join hands, it is called a horizontal merger.
The Federal Trade Commission and the Department of Justice will assess how the deal, which isn’t expected to close until 2023, would affect commerce in the United States. Either agency, under federal antitrust law, can attempt to block a proposed merger or acquisition if it would substantially lessen competition, which can harm consumers through increased prices, limited choices or diminished incentives for innovation.
In 2020 the FTC sued to block Edgewell Personal Care Company’s proposed $1.37 billion acquisition of main competitor, Harry’s Inc. The FTC was concerned about the removal of “a critical disruptive rival that has driven down prices and spurred innovation in an industry that was previously dominated by two main suppliers, one of whom is the acquirer.” A week later, the two companies abandoned their deal.
But the government sometimes loses. In 2019, the U.S. Appeals Court for the District of D.C. rejected the DOJ’s attempt to block a vertical merger between AT&T and Time Warner. The DOJ failed to provide similar examples of past vertical mergers that were blocked. The AT&T-Time Warner merger, the court also reasoned, didn’t appear likely to impact prices in a statistically significant way.
Microsoft is no stranger to antitrust worries. In 1998, the DOJ sued the tech giant for alleged monopolistic practices. Microsoft had bundled Internet Explorer with Windows and made it difficult to uninstall. These and other moves thwarted rivals, including Netscape. After losing at trial, Microsoft was set to be divided into two companies. But the company successfully appealed. Microsoft and the DOJ eventually reached a settlement that averted a breakup but called for technology sharing.
The regulatory timing for Microsoft isn’t ideal. On Jan. 18, the FTC and DOJ announced a plan to more aggressively challenge measures they deem illegal. The agencies seek to modernize enforcement, especially for digital and technology products that fall under the “Big Tech” umbrella. “Our merger guidelines,” FTC Chair Lina Khan emphasized, “[must] accurately reflect modern market realities and equip us to forcefully enforce the law against unlawful deals.”
Microsoft, which battles Sony and Nintendo for dominance in the console space, has been an active acquirer of publishers. Earlier this year it reached a $7.5 million deal to buy ZeniMax Media, which owns Bethesda Softworks (the publisher of Fallout and other popular games).
Mindful of federal scrutiny, Microsoft has attempted to dispel worries of diminished competition. Microsoft insists that even with acquiring Activision Blizzard, it would trail Tencent and Sony as the third-largest gaming company in the world. The company further emphasizes that Apple and Google, not Microsoft, distribute mobile games and are paid by consumers for those games.
Microsoft adds that it has “no intention” of removing games from other platforms, a pledge worded carefully—intentions can, of course, change—but is meant to reassure not only PlayStation gamers but federal regulators, too. Meanwhile, Newzoo, a provider of games and esports analytics, estimates that Microsoft’s acquisition of Activision Blizzard would significantly boost the company’s share of the gaming market, though still only from 6.5% to 10.7%. Microsoft insists it partakes in a “diverse and fragmented”—and, by inference, competitive—market where innovation and prices wouldn’t be adversely impacted by the acquisition.
While Activision Blizzard is a leading publisher and esports provider, it is still one of many. The problematic possibility of Microsoft adding exclusives to its consoles and PCs is also not a new or unique phenomenon. Console exclusives have been around since the days of the Atari 2600. PlayStation gamers are familiar with them. Sony hasn’t allowed its most popular game series, including God of War, Uncharted and Ratchet & Clank, to be sold for the Xbox or Nintendo. Those games are produced by studios that Sony launched or acquired. If Microsoft can’t sell Call of Duty exclusively, why can Sony sell The Last of Us exclusively?
That’s the kind of question Microsoft hopes federal regulators ask.