In a 53-page redacted decision, Northern California District Court Judge Jacqueline Scott Corley said the FTC had not demonstrated it was likely to show that the deal would substantially limit competition. To the contrary, she said the evidence produced in the litigation indicated that the acquisition might make popular Activision games such as “Call of Duty” available to more consumers.
The judge’s decision indicates that Microsoft could close its Activision deal this month. Microsoft is obligated to pay Activision a $3 billion termination fee if the deal does not close by July 18, according to the decision.
The decision probably scuttles the FTC’s plans to hold an administrative trial over the deal in August because court filings indicate that Microsoft could move to close the deal within the week.
The agency has argued that the acquisition would allow Microsoft to thwart competitors by withholding Activision’s popular game titles from rival console makers. The regulator also argued that the deal could give Microsoft an unfair advantage in the nascent market of cloud gaming, which allows players to stream video games from PCs, tablets and gaming systems.
“We are disappointed in this outcome given the clear threat this merger poses to open competition in cloud gaming, subscription services, and consoles,” FTC spokesman Douglas Farrar said in a statement. “In the coming days we’ll be announcing our next step to continue our fight to preserve competition and protect consumers.”
The decision marks a victory for Microsoft, which has made commitments to regulators around the world to address competition concerns about the deal. Scott Corley said in her decision that the “scrutiny has paid off.” She cited Microsoft’s commitment in court to keep “Call of Duty” on PlayStation for 10 years, as well as a deal the companies made with Nintendo to bring “Call of Duty” to its Switch device.
“We’re grateful to the court in San Francisco for this quick and thorough decision and hope other jurisdictions will continue working towards a timely resolution,” said Brad Smith, Microsoft vice chair and president. “As we’ve demonstrated consistently throughout this process, we are committed to working creatively and collaboratively to address regulatory concerns.”
The case was widely seen as a bellwether of Democrats’ ambitious plans to rein in Silicon Valley. FTC Chair Lina Khan and other President Biden tech enforcers were widely expected to usher in a new era of stricter tech regulation, but they have faced critical losses in the courts.
This year, another Northern California judge allowed Meta to move forward with the acquisition of the virtual reality company Within. The FTC made similar arguments in its challenge to that deal, arguing that the acquisition could harm competition and innovation in virtual reality.
The deal gave Meta, the maker of the Oculus virtual reality headset, control of Within’s popular fitness game, “Supernatural.” The FTC argued in its lawsuit that the deal put Meta closer to its goal of “owning the entire ‘Metaverse,’” a virtual world that the company has bet is the future of the internet.
The stinging losses underscore the risks of antitrust enforcers’ more aggressive posture on tech deals.
Khan and her colleagues rose to power criticizing past antitrust enforcers for not being forward-looking in their approach to deals in Silicon Valley. During the Barack Obama administration, tech companies amassed more power and influence by buying smaller rivals before they even took off, such as Facebook’s purchases of Instagram and WhatsApp. Now in control of the FTC, Khan has sought to bring more forward-looking challenges in markets that are just emerging, such as virtual reality and cloud gaming.
Her counterpart at the Justice Department, Jonathan Kanter, has promised to take a similar tack, launching a division focused on artificial intelligence that he calls “Project Gretzky” — a reference to hockey star Wayne Gretzky’s quote about skating where the puck is going to go.
But these cases are riskier because they are more difficult to win in U.S. courts, where judges have held a fairly narrow interpretation of antitrust laws.
The Democrats’ approach has been further complicated by gridlock in Congress, where efforts to pass new legislation addressing the power and influence of tech giants have stalled.
Tuesday’s loss could exacerbate the political scrutiny of Khan’s record. The Republican-led House Judiciary Committee is scheduled to host a hearing with Khan on Thursday, which is expected to be combative. The Committee said in its description of the hearing that it will probe Khan’s “mismanagement of the FTC and its disregard for ethics and congressional oversight.”
Since Microsoft announced its plans for the deal last year, it has produced nearly 3 million documents and sat for 15 investigational hearings with the FTC. The judge said those internal emails, chats and other documents do not contradict Microsoft’s promises to not make “Call of Duty” exclusive to Xbox.
The judge wrote in her Tuesday decision that Microsoft has little incentive to foreclose the popular game from PlayStation because it would cause great reputational harm to the tech giant, and the ability to play the game on multiple different devices is critical to its financial success. She also disputed the FTC’s arguments that this deal would hurt cloud gaming, citing the five agreements that Microsoft made to bring Activision games to its streaming competitors.
The judge wrote that video gaming represents “the fastest growing form of media and entertainment,” noting that revenues exceed the film, music and print industries. In blocking the deal, she repeatedly cited the judge’s decision to allow Meta’s purchase of Within to proceed.
Anti-monopoly advocates criticized the judge’s decision and pressured the FTC to continue its fight against the deal.
“The FTC should appeal this decision and pursue an emergency stay of Judge Corley’s order so that it can continue its administrative case against Microsoft’s monopoly ambitions,” said Lee Hepner, legal counsel at the American Economic Liberties Project.
Hepner also said the decision is tainted at “a time when judicial ethics are top of mind for many.” A watchdog group had called on Scott Corley to recuse herself from the litigation because her son works for Microsoft.
Microsoft and Activision have been navigating an unpredictable regulatory environment, as governments around the world take a tougher line against U.S. tech companies. The United Kingdom’s Competition and Markets Authority in April blocked the deal, warning that it would give Microsoft too much power in the fast-growing cloud games market. The European Commission, however, gave the deal the green light after Microsoft agreed to license popular Activision games free to other cloud streaming providers.
Microsoft’s Smith said after Tuesday’s decision, the company was turning its attention back to the U.K.
“While we ultimately disagree with the CMA’s concerns, we are considering how the transaction might be modified in order to address those concerns in a way that is acceptable to the CMA,” he said. “In order to prioritize work on these proposals, Microsoft and Activision have agreed with the CMA that a stay of the litigation in the UK would be in the public interest and the parties have made a joint submission to the Competition Appeal Tribunal to this effect.”
The CMA said in a statement that it stands “ready to consider any proposals from Microsoft to restructure the transaction” to address the competition concerns it laid out in its decision to block the deal.
Activision would help Microsoft expand beyond its core businesses of office software, personal computers and cloud computing. Acquisitions of companies such as GitHub and LinkedIn have been central to Microsoft’s diversification strategy.
In June, Microsoft said its cloud gaming service, Xbox Game Pass, was available in more than 40 countries. In addition to “Call of Duty,” Activision owns “World of Warcraft,” “Candy Crush” and Tony Hawk’s “Pro Skater.”
