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FTC sues to block megadeal

FTC Sues to Block Microsoft’s Purchase of Activision Blizzard, Stocks Soar

Microsoft’s acquisition of video game producer Activision Blizzard was to be challenged in court, the Federal Trade Commission (FTC) declared on Thursday. The regulatory agency claimed that Microsoft could stifle competition for its gaming platforms and services by agreeing.

Microsoft shares closed the day up by 1.2% despite the FTC’s opposition to the proposed merger, supported by gains for the broader market that boosted technology stocks. On the other hand, the stock of Activision Blizzard ended the day down about 1.5%. So, considering the most recent news, should investors sell their stocks?

Microsoft has faced pressure from competitors before. In the United States in 1998, The Justice Department brought a comprehensive antitrust lawsuit against the business. As a result, Microsoft modified some procedures linked to its Windows operating system business. In addition, regulators in the UK are investigating whether the Activision Blizzard purchase will result in less competition there.

In January, Microsoft made clear that it intended to buy Activision Blizzard for $68.7 billion, with the transaction being completed by June 2023. However, Sony and other rivals of Microsoft in the gaming industry have put pressure on the agreement. Microsoft has committed to making popular “Call of Duty” games available on gaming platforms besides those owned by Microsoft. It has repeatedly stated that it will not be the world’s leading gaming provider if the acquisition continues.

In a statement, Brad Smith, Microsoft’s vice chair and president stated, “We continue believing that this deal will boost competition and generate more options for gamers and game creators.” “We have been committed from the start to addressing concerns about competition, and earlier this week, we offered recommended concessions to the FTC. Despite our commitment to pursuing peace, we are confident in our position and welcome the chance to argue it in court.

The FTC’s administrative lawsuit, which the agency’s administrative law judge will hear, was approved by a 3-1 vote of the FTC commissioners. After a trial-like session in that process, the ALJ renders a preliminary decision. The initial decision may be appealed to the full commission for a vote by the respondent or FTC employees acting as “complaint counsel.” The respondent still could request a federal appeals court reconsider the commission’s decision after that.

“With control of Activision’s content, Microsoft would have the ability and increased incentive to withhold or degrade Activision’s content in ways that substantially lessen competition — including competition on product quality, price, and innovation,” the FTC said in its complaint. “This loss of competition would likely result in significant harm to consumers in multiple markets at a pivotal time for the industry.”

According to the FTC’s statement, Microsoft has a history of purchasing games and exploiting those transactions to stifle competition from rival console-making businesses, including with its 2021 ZeniMax agreement. After the European Commission approved the deal, Microsoft announced that it was turning ZeniMax games like Elder Scrolls VI, Redfall, and Starfield into exclusives, the FTC claimed in its lawsuit. Microsoft had previously committed to antitrust officials of the European Commission that the company would not have the incentive to prevent people from playing ZeniMax games on consoles other than the Xbox.

According to the FTC, Activision Blizzard has delivered its games regardless of the manufacturers of the devices, but if Microsoft were to complete the deal, that status might change. According to the agency, Microsoft might raise pricing, make competing devices, such as Sony PlayStation consoles, less enjoyable, or prevent Activision Blizzard consoles from being compatible with systems other than Xbox systems.

Although Sony has a lineup of exclusive franchises, Microsoft has games exclusive to the Xbox. However, over time, Microsoft has also released games like Minecraft for other platforms. In October, Phil Spencer, the CEO of Microsoft’s gaming division, noted that Sony has its exclusive franchises. More players should be playing the games the corporation owns, not less, he claimed.

Microsoft is looking to grow the number of customers who sign up for its Game Pass program, which gives users access to hundreds of games. People may play games that stream from Microsoft data centers on a range of devices, including smartphones, with the Game Pass Ultimate membership tier.

In its argument, the FTC said that the planned merger has a reasonable chance of stifling competition or establishing monopolies in the markets for high-performance consoles, cloud gaming, and gaming subscription services.

“We want Call of Duty to be enjoyed by more players around the world. That requires COD being on diverse platforms after the merger of Microsoft + Activision Blizzard,” Activision’s executive vice president for corporate relations and communications, Lulu Cheng Meservey, announced in a tweet.

The case marks a significant turning point for FTC Chair Lina Khan, who has long advocated for strict action on technology. While a lawsuit to stop Facebook owner Meta from buying a virtual reality fitness app company has been filed during her tenure, the case to stop the Microsoft-Activision acquisition is notable for being the largest technological transaction to date.

Jonathan Kanter, Khan’s colleague at the Justice Department’s antitrust division, and she have stated that they want the agencies to feel more at ease with taking significant risks and that a high success rate in court likely indicates that they aren’t fighting enough cases.
Unlike a substantial victory by the Department of Justice in its action against Penguin Random House’s proposed acquisition of Simon & Schuster, federal enforcers have recently witnessed a streak of defeats in merger disputes.

Despite announcing that it would appeal the decision, the FTC’s administrative law judge dismissed the commission’s objections against Illumina’s proposed acquisition of Grail in the biotech industry. In addition, the three merger cases that the Antitrust Division has so far lost, including UnitedHealth Group-Change Healthcare, US Sugar-Imperial Sugar, and Booz Allen Hamilton-EverWatch. According to the Antitrust Division, they are being appealed or thought about for appeal.

In a Wall Street Journal editorial piece earlier this week, Smith gave a sneak peek of Microsoft’s reasons against blocking the merger, calling it a “big mistake” to do so.

“Microsoft faces huge challenges in the gaming industry,” Smith wrote, adding that its Xbox console gaming system is in third place behind Sony’s PlayStation and the Nintendo Switch. Microsoft also has “no meaningful presence in the mobile game industry,” he said. He called out Apple and Google, claiming that even though the mobile game industry is rapidly expanding and has substantial income, those two app store operators capture a “major share” of those profits through their developer fees.

Because it acquired King in 2016, the company that creates the Candy Crush Saga video game, Activision Blizzard, now has a presence on mobile platforms. Activision Blizzard reported in November that the Candy Crush brand has more than 200 million active monthly users.
Smith pointed out that Microsoft’s acquisition of Activision would enable it to compete effectively in the gaming sector, fostering innovation and assisting consumers. The corporation is “as enthusiastic about this deal as Blockbuster was about the rise of Netflix,” he claimed, playing down worries raised by rivals like Sony.

Following the FTC’s announcement of its action, the price of Activision Blizzard shares dropped to a session low of $73. Additionally, Microsoft has agreed to pay $95.00 for each share.
Activision Blizzard CEO Bobby Kotick wrote in a memo to staff members that the claim that the agreement is anti-competitive is unsupported by the evidence.

“Simply put, a combined Microsoft-ABK will be good for players, good for employees, good for competition, and good for the industry,” he wrote. “Our players want choice, and this gives them exactly that.”

Last month, Politico reported that the FTC would probably attempt to discourage the deal. (Source: CNBC)