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If you want something new to read about the case, the most recent FTCWatch has an opinion piece by Neil Averitt, someone who has practiced law at the FTC for 37 years.

It's under subscription, but there you go:

The high-wire act of the Activision case

The Biden administration has given us a series of high-risk, potentially game-changing antitrust initiatives, but this effort to rein in Big Tech is on the highest wire so far. The Federal Trade Commission's challenge to the Microsoft/Activision combination is based, amazingly enough, on the contention that acquiring a video game franchise is enough to confer market power. And even more amazingly, it's possible this is true.

The case promises a series of thrills and near-falls. It starts out on a tricky note, as a challenge to a vertical merger. But perhaps that may work. Microsoft's distribution system is very strong and if it's combined with Activision's popular game content, it may be hard for others to compete against it. But wait! That's a static view of the world, and other distributors can surely come up with alternative games that will keep them in business. Seen this way, the FTC case seems like a distinct long shot. But wait again! No one's that risk-inclined. Perhaps the agency is playing an alternative game and can prevail on some basis other than a conventional Clayton Act theory.

But none of this is a sure thing.

The proposed acquisition was announced Jan. 18, 2022, as a predominately vertical merger. Microsoft is a software creator and distribution company. It makes the popular Xbox gaming consoles, and is rolling out subscription services to allow game players to download titles from a central library, or to play games in the cloud and stream the images to a variety of relatively simple devices, including smartphones. The firm had total revenues in FY2022 of $198 billion, and gaming revenues of $16 billion. With this acquisition, it will be gaining popular material to put through these distribution systems. Activision makes several immensely popular games, including Call of Duty and Candy Crush. Titles in the Call of Duty series made up 10 of the top 15 console games sold in a recent 10-year period. Activision's annual revenue is approximately $9 billion. The overall deal is valued at a startling $69 billion — the largest ever in the video gaming industry.

The FTC has so far declined to seek an injunction in federal court (although that action is authorized), and has instead issued an administrative complaint for internal adjudication. Quite probably the agency hopes proceedings in the EU will freeze the situation anyway. It seems to be aiming to write its own decision, where it will have more control over the analysis of an innovative theory.

At first glance, the FTC's case does not seem all that innovative; it speaks in the established language of vertical foreclosure. By acquiring Activision, the complaint says, Microsoft can reverse its current policy of universal distribution and instead make its games exclusive to Microsoft, or it can degrade their quality to others. If the revenue to be gained by doing so exceeds the losses caused by giving up distribution through other channels, Microsoft may do just that. This is likely to harm consumers through higher prices, less variety, and the like. And, crucially, the competing distribution firms such as Sony will not be able to counter this move, because without equal access to Activision products — and to Call of Duty in particular — they can't be competitive in the videogaming market.

The innovation lies in how very hard the FTC will have to work to sustain these contentions.

For one thing, Microsoft's actual financial incentives will depend on the diversion ratios seen in response to various possible actions, and those will surely be open to dispute.

A bigger problem is the contention that Activision games are an essential resource, a must-have product. This implies an unrealistically static view of the market. Video games are not a finite asset; they can be created by raising money and assembling the necessary designers. The lack of particular games is therefore not a clear entry barrier. Other competitors of Microsoft — Sony, Nintendo, and perhaps firms like Amazon, Netflix and Valve, have the resources to develop or acquire games of their own.

The complaint recognizes at least five other suppliers, in addition to Microsoft and Activision, that currently make the highest-quality ("AAA") games. These include Electronic Arts (FIFA), Take-Two (Grand Theft Auto), Ubisoft (Assassin's Creed), Epic Games (Fortnite), and Sony (God of War). Surely some AA studios could up their game as well.

Other numbers tell a similar story. Microsoft ranks only No. 2 or No. 3 in the console business, behind Sony and probably also Nintendo. A combined Microsoft and Activision would control 11% of the global game business, according to the Wall Street Journal. The Call of Duty franchise, according to figures in the FTC complaint, averaged sales of $1.5 billion per year through 2020, fairly small in relation to a global gaming market that is now $170 billion per year — five times the value of all motion pictures.

To be sure, the antitrust markets might be argued more narrowly ("high-performance consoles," "AAA games," or "US only") and the resulting concentration figures might become higher. Still, none of this really looks like the obvious foreclosures seen in successful vertical cases such as Lockheed/Aerojet, Nvidia/Arm or LiveNation/Ticketmaster.

The one number that solidly supports the FTC concerns is the $69 billion purchase price for Activision. That's a lot of money — more than twice the value of Kroger/Albertsons — and Microsoft surely thinks it is getting some useable competitive value for it. It will be interesting to learn what's in the company's ordinary-course documents.

There's a decent chance, however, that Microsoft's goal is exactly what the firm says it is: to develop a popular, profitable (and addictive) ecosystem that offers gamers a variety of new, Internet-based ways to access games. These will be increasingly based on subscriptions or on cloud gaming, and not limited to traditional consoles, and will offer a mix of games, some being proprietary and others universally available.

Such a model is likely to move the gaming world toward a limited number of powerful distributors. That may be worrisome in the greater concentration it brings to the industry, but, given that Activision isn't really an essential input, it's hard to argue that competition will be harmed in any traditional Clayton Act sense as a result of this merger.

So at this point, the FTC complaint looks like a high-risk effort indeed.

But that's not necessarily right. This is a flagship litigation for the agency. It's more likely that the agency is hoping to prevail on one of three alternative, nontraditional approaches.

First, it may hope that the delay and bad publicity will persuade Microsoft to simply abandon the transaction.

Second, the FTC may be raising the costs to Microsoft in the hopes of getting a more generous settlement. Until recently, Microsoft had offered conspicuously little. The precise terms continue to evolve, but Microsoft has now undertaken to make Call of Duty available to Sony and Nintendo hardware (and perhaps also to Valve) for a 10-year period. This is helpful, but it doesn't address the FTC's main concerns, which extend to other programs beyond Call of Duty, and to newer distribution methods, such as the subscription services and cloud gaming. However, recent reports say the FTC isn't much interested in negotiating a deal, particularly one involving complex behavioral remedies. (See Microsoft-Activision remedy talks not welcome by FTC, Dec. 5, 2022.) That would bring us to the last option.

Third, the agency may be aiming to prevail by establishing some new, non-traditional principles of vertical mergers. Illumina/Grail provides a model. The case would not emphasize the existing, largely competitive market for consoles, but rather the emerging siloed markets for subscription services (where some calculate Microsoft already has a 60 percent share) and for cloud computing (where only a few big firms are likely to remain). That limited number of firms is perhaps enough to keep the market price-competitive. However, it could be challenged as insufficient to sustain the kind of flexibility, innovation, and nonprice competition that would have existed without the merger.

The complaint cites Section 5 of the FTC Act as well as Section 7 of the Clayton Act. If an aggressive theory aimed at anticipated future lines of commerce can't be squared with Clayton Act case law, the agency might choose to pursue it as an incipiency case under Section 5. Even if Activision isn't strictly essential to Microsoft's rivals, in other words, its acquisition could be an important first step toward a reasonably foreseeable world in which few competitors will remain. Serial acquisitions and salami tactics must be stopped somewhere.

That's not a totally safe litigation course, because it would use Section 5 to alter rather than just supplement Clayton Act standards. But it still involves a defensible construction of the statute, and the current leadership of the FTC is determined to get a handle on concentration in the world of Big Tech.

Source: Idas.