UPDATED TIMELINE: U.S. court to hear FTC request for preliminary injunction against Microsoft-ActivisionBlizzard next week, merger technically can't close in June but on track for July

By the end of next week, the UK Competition & Markets Authority (CMA) will probably have lost its only ally against Microsoft's purchase of Activision Blizzard: the U.S. Federal Trade Commission (FTC) may still be against the deal, but I believe it will have lost decisively. I consider it highly likely that the United States District Court for the Northern District of California will deny the FTC's motion for a preliminary injunction (PI) that was filed on Monday. A temporary restraining order (TRO) has issued (unsurprisingly), and a two-day PI hearing will be held in about a week (Thursday, June 22, and Friday, June 23). The court will probably rule at the end of the hearing, or very shortly thereafter.

Against that backdrop, the earliest closing date--if Microsoft is prepared to close over the CMA's objection--will be Monday, July 3, which means that two weeks would still be left under the existing merger agreement to find middle ground with the CMA, which presumably knows that its April 26 decision is indefensible on appeal.

Here's my updated timeline chart (click on the image to zoom in and make it look crisper):

Now let's talk about the latest developments since yesterday's post. You can find my real-time commentary on this rapidly-evolving merger topic on Twitter, so for my Twitter followers some of the below is not new.

First, FTC v. Microsoft & Activision was related (i.e., merged for procedural purposes) with the class-action-style lawsuit in the same district, and the same judge--United States District Judge Jacqueline Scott Corley--is now presiding over the proceedings, particularly also next week's PI hearing. She recently denied a PI that was requested by the "gamers" who act as plaintiffs for the lawyers who are the driving force (and have received at least some logistical support from Sony).

The basis on which the PI was denied in the private action was that even if the court had agreed with the class-action lawyers on irreparable harm (negative consequences for consumers from the consummation of the merger), such hypothetical harm would not have been immediate. The likelihood of success on the merits (i.e., the question of whether those plaintiffs could prevail after a full trial) was never reached. In fact, the PI hearing was purely about irreparable harm and its non-immediacy.

In the FTC case, the focus will be very much on the likelihood of success on the merits. In the equitable analysis, it could--and in my view should--still weigh against the grant of the PI that any of the alleged effects of the merger are far-fetched and (even if they were--as they are not--realistic) far off. The balance of hardships here comes down to the FTC seeking to kill a merger that has a July 18 closing date while any of the hypothetical effects on competition would not materialize for quite some time to come, especially in light of the fact that Microsoft offered contractual commitments for 10 years. That 10-year period would be more than enough for the case to be litigated (even for the exhaustion of all appeals) and Microsoft theoretically being forced to divest some or all of the acquired assets at that stage.

The FTC chose to bring a complaint before its in-house Administrative Law Judge (ALJ), which is constitutionally controversial. In light of the Supreme Court's recent Axon decision, it is even harder for the FTC to explain why it didn't sue in federal court. Now the FTC runs to the court in San Francisco and wants it to kill a $70B deal, while the only reasonable venue choice would have been to start a federal lawsuit in December.

At one of the hearings in the private lawsuit, Judge Corley made reference to her colleague Judge Edward Davila's denial of a PI that the FTC was seeking against Meta's acquisition of virtual reality fitness app maker Within. I discussed the Meta-Within decision in early February. That case was, relatively speaking, a stronger one for the FTC than its opposition to the acquisition of Activision Blizzard King (ABK). The substantive issues are different, but there is an abstract parallel here in the sense that the FTC espouses some wild theories without any hard facts to back them up.

Realistically the FTC won't have any "smoking gun" to present at the PI hearing. They will presumably just serve a lot of weak tea on those two days. The FTC's console theory of harm has been rejected by the regulators in charge of 40 countries (even the CMA dropped it). It also raised cloud gaming, which was more of an afterthought in the beginning but will probably be put front and center now because of the CMA decision. As you can also tell from my timeline chart, the CMA decision came down a few weeks prior to the mid-May PI hearing in the private lawsuit, but the clearance decisions by the European Commission, China's SAMR, and South Korea's KFTC were announced only subsequently (second half of May). The CMA and the FTC are outliers, and it can be inferred from the public redacted version of the FTC's filings that Microsoft and ABK essentially forced the FTC's hand by saying they might close the deal as early as this week's Friday, triggering the proceedings in federal court that I believe will simply take the FTC out of the game, isolating the CMA.

There may be some discussion of the CMA decision now, but the fact of the matter is that the United States District Court for the Northern District of California is not the appeals court for the CMA: the UK Competition Appeal Tribunal has jurisdiction over appeals from CMA decisions, and the CAT will hold its appellate hearing in late July and early August (as my timeline chart also shows). I was in London earlier this week for a conference (where I was invited--on very short notice--to speak) and seized the opportunity to attend a CAT hearing in person. I must admit I'm honored and humbled by the fact that Mr Justice Marcus Smith, the President of the CAT, stayed at that conference even after his AI-centric keynote speech and listened to the panel session to which I made my little contribution. I had a good time there, and the UK in general seems to be very much open for business, but the CMA's antics are one of the issues that must be addressed there.

I believe it won't be hard for Judge Corley to see that the CMA decision is unlikely to stand. For just one example of many, even the class-action lawyers alleged a Microsoft cloud gaming market share of "only" 40%, while the CMA arrived at a 70% figure, which is not only an exaggeration but a lunacy. The combination of the CMA decision being obviously flawed and the global picture--approximately 40 countries in favor--is dynamite.

On Tuesday, Judge Edward J. Davila--the Meta-Within judge--helped out Judge Corley by entering a TRO:

Federal Trade Commission v. Microsoft and Activision Blizzard (case no. 23-cv-2880-JSC, N.D. Cal.): Order Re: Temporary Restraining Order and Preliminary Injunction

A few hours earlier I had tweeted (while waiting for a flight at Heathrow Airport) the following:

The hurdle for a temporary restraining order is low but it also wouldn't solve the problem the FTC is facing: they need a preliminary injunction.

Judge Corley knows the merger, could deny TRO but again, a merger TRO wouldn't mean much. At the latest, FTC will fail to get a PI.

— Florian Mueller (@FOSSpatents) June 13, 2023

The FTC almost always gets a TRO, but the current FTC also loses almost every merger case when it really matters.

Given that Judge Corley is already familiar with this merger and that the FTC's complaint is egregiously weak, this case could have become an exception to the rule that the FTC always gets a TRO. But given the size of the transaction and all the publicity surrounding this merger, it's easy to see why the court didn't want to humiliate the FTC by denying a TRO. The FTC's TRO motion mentioned that most defendants even stipulate to a TRO, and given that Judge Davila entered the order even before Microsoft or Activision Blizzard had made any filing (other than lawyers signing up), we don't even know how much resistance the merging parties would have mounted.

The TRO order does not address the merits in the slightest. It's purely procedural. It's just a scheduling order. Microsoft and ABK will file their opposition briefs on Friday (and they can take until right before midnight Pacific Time). The FTC will reply by noon Pacific Time on Tuesday.

The TRO will be in place after the PI decision. Assuming that the court rules at the end of the PI hearing and throws out the motion (which is my prediction), that means the end of Friday, June 30. Practically that makes Monday, July 3, the earliest practical closing date. The next day is Independence Day.

The additional time after the PI decision would theoretically enable the FTC to appeal a denial to the United States Court of Appeals for the Ninth Circuit, and to seek emergency relief there.

There will be more than two weeks left between the PI hearing and the contractual closing date. I won't give up hope that a solution can be worked out between Microsoft and the CMA. Otherwise, after the FTC is defeated in federal court, "closing over" is obviously a possibility, though the parties in that scenario should not find it hard to agree on a short extension to await a CAT decision.

The merger is on the right track, and I continue to believe that it will consummate.

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Sony doesn't want to provide documents and/or witnesses Microsoft requested in Federal Trade Commission adjudicative proceeding regarding its Activision Blizzard deal

On Wednesday, I wrote that Sony may live to regret the market definition and theory of harm it espouses in connection with Microsoft's acquisition of Activision Blizzard King (NASDAQ:ATVI), and that "the top three priorities for third-party interrogatories and depositions will be Sony, Sony, and Sony." Today it turned out that Sony--despite all of its efforts to lobby regulatory authorities over the deal--is indeed uncomfortable with its obligations as a highly relevant third party to the Federal Trade Commission's in-house adjudicative proceeding as well as the private antitrust lawsuit in the Northern District of California that is going forward in parallel.

On Friday, Sony Interactive Entertainment made a filing with the United States Federal Trade Commission's in-house court that just became public:

The filing says Microsoft served a subpoena on Sony on January 12, which according to Sony did not name the proper recipient and was not properly served, so Microsoft revised it and served Sony again last Tuesday (January 16). Sony would have had only until January 20 (Friday) to file a motion to quash or limit, or to otherwise respond to, the subpoena. That was the date Microsoft stated in the original subpoena as well as in the revised one. Sony understands, however, that Microsoft is fine with giving Sony a one-week extension, i.e., until this week's Friday, January 27. Therefore, Sony brought a motion for an extension of time that it described as unopposed ("agreed motion").

The fact discovery cutoff date in that adjudicative proceeding is April 7. Some of the time between now and that cutoff date may have to be spent on the resolution over this discovery dispute.

The motion notes that "[n]egotiations between [Sony Interactive Entertainment] and Microsoft as to the scope of [Sony Interactive Entertainment]’s production and a discovery schedule are ongoing." This tells us two things:

1. Microsoft has apparently requested documents from Sony that the latter--the only vocal complainer over the transaction in question--isn't willing to provide without a fight. Alternatively or additionally, there could also be disagreements over Sony executives whom Microsoft's lawyers would like to depose.

2. As the motion notes, the purpose of the extension is for the two companies to try and work it out (if not in whole, then at least in part). Should those efforts fail to result in a complete agreement on the scope of the discovery Microsoft's lawyers can conduct of Sony's business, Sony apparently intends to file--on Friday--a motion to quash or limit the subpoena. In that case, we'll get an idea as to what parts of Microsoft's subpoena Sony is unwilling to comply with.

Microsoft is the first-named defendant to the FTC's in-house complaint. It is part and parcel of Microsoft's fundamental rights as a defendant to be allowed to take discovery of third parties. All the facts must be put on the table in order for Administrative Law Judge (ALJ) D. Michael Chappell in Washington (and soon also United States District Judge Jacqueline Scott Corley in San Francisco, at some point with the assistance of a jury) to be able to make the right decisions.

If Sony doesn't like that, it can always cut things short by accepting the ten-year Call of Duty license that Microsoft has publicly offered. Without a single vocal complainer left, competition authorities would presumably not be interested in attempting to block the deal.

Sony's own business model is "fair game" for discovery in this context. Sony is essentially alleging that Microsoft would do with ABK's games what Sony is doing all the time with other games: Sony acquires studios to have more first-party titles, and enters into exclusive agreements over third-party titles or particular features of such titles (for example, Call of Duty - Modern Warfare II comes with various "exclusive benefits" for PlayStation gamers).

In connection with Microsoft-ActivisionBlizzard, Sony is just a third-party complainer and not directly exposed to any risks. But Sony finds itself on the receiving end of antitrust actions from time to time, such as the PlayStation You Owe Us class action in the UK. Some of Sony's dirty linen may get washed in public when those Activision Blizzard cases go to trial--and come back to haunt Sony.

Lawyers from the Cleary Gottlieb firm--the most senior one of whom appears to be D. Bruce Hoffman, a former Director of the FTC's Bureau of Competition--brought the motion on Sony's behalf. Cleary also made a filing for Sony with the UK Competition & Markets Authority (CMA). I have a lot of respect for that firm. I'm not surprised Sony retained Clearly, whose antitrust practice group has been adverse to Microsoft on various occasions, even including an EU case about 20 years ago. It's just that even the best lawyers can't make a case out of thin air, and can't help their clients avoid all of its discovery-related obligations.

Given that Sony doesn't want all of the facts about its own content-centric strategy to be discussed in public trials, and that there are no signs of Sony ever having reacted constructively to Microsoft's ten-year licensing offer, I strongly suspect that we will see a motion to quash or, more likely, limit the subpoena. The scope of that motion may, however, very well be narrowed a bit by the talks that are being held these days.

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CHART: Key deadlines in Microsoft-ActivisionBlizzard merger reviews in U.S., UK, EU, New Zealand between now and late April

A picture is sometimes worth a thousand words when looking at complex multi-jurisdictional matters, which is why I occasionally draw up battlemaps or other charts. Here's a chart that I've just created to show the key deadlines coming up between now and late April in the ongoing reviews of (and litigations over) Microsoft's acquisition of Activision Blizzard (NASDAQ:ATVI) in four jurisdictions (United States, United Kingdom, European Union, and New Zealand) (click on the image to enlarge; it will also look at lot better if you do):

In my previous post on this topic, I provided an update on the so-called gamers' lawsuit (which is actually a lawyers' lawsuit) in the Northern District of California, which has been reassigned to United States District Judge Jacqueline Scott Corley. While only a sideshow, that piggybacking case has the potential to repeatedly make news in the months ahead by virtue of the high degree of transparency of federal civil litigation in the United States (and especially in that district).

In the FTC's in-house case (wouldn't we all like the luxury to put our cases before our own judges?), Administrative Law Judge (ALJ) D. Michael Chappell issued a scheduling order on January 4, but it was yesterday that I first spotted the order on the FTC's website. It was previously known that the trial would be held in August, subsequently to which it can take a number of months for a decision to come down. But if Microsoft and Activision Blizzard King are otherwise ready to close the deal, the FTC will have to move for a preliminary injunction in federal court, as it acknowledged at least week's case management hearing. The class-action lawyers in California are already seeking a PI, but the originally scheduled PI hearing (February 16) has been vacated and I believe the most likely date is March 23, the day for which Judge Corley has scheduled a case management conference.

The UK Competition & Markets Authority (CMA) has not stated precise dates for the various milestones between now and the final decision deadline (April 26). For instance, the publication of its findings has been slated for late January or early February, which is kind of vague.

In the EU, the key question is whether--and if so, when--a Statement of Objections would come down. An SO is a key requirement for due process reasons. Subsequently, the notifying parties get some time to file a written response (with the benefit of access to DG COMP's case file), and are entitled to a hearing. Given that certain minimum amounts of time are necessary for all of that, an SO has to issue about two months to two and a half prior to a decision deadline. The deadline here has been extended once, and could be extended again. I've seen reports that expect a hypothetical SO to be handed down in January, but I've also heard from a third-party Brussels source that the EU merger review should reach that key milestone only next month. Microsoft told ALJ Chappell that the plan was to resolve the matter in the EU and the UK based on specific commitments, which would then be proposed to the FTC. This also makes a further postponement of the EU deadline a possibility (DG COMP gets more time when commitments are offered late in the game).

There has been speculation in the media that an SO would issue prior to an agreement on remedies, but again, that is just speculation.

In merger reviews, deadlines are not always exhausted. For example, when the UK CMA gave notice of a recent extension, it explicitly stated that the objective was to reach a conclusion sooner. That's why the above chart just reflects what is publicly known today. Things can change any moment, be it because of postponements or decisions being made sooner.

The transaction has already been cleared in four jurisdictions, most recently Chile.

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Microsoft, Activision Blizzard drop 6 of their 23 defenses, no longer challenge constitutionality of FTC's in-house lawsuit; UK CMA extended deadline by almost two months

On Wednesday, the FTC's Chief (and currently only) Administrative Law Judge (ALJ) D. Michael Chappell handed down an order (PDF) granting parallel motions by which Microsoft and Activision Blizzard--with the FTC's consent--sought to withdraw six of their 23 defenses to the agency's merger complaint. The dropped defenses (16-22) challenged the constitutionality of this proceeding and even of the FTC as an institution. The previous defense #23, which says the FTC oversteps its Section 5 competences, is the new defense #17.

Microsoft's amended answer (PDF) is already available on the FTC's website; Activision Blizzard King's presumably won't take long to show up as well.

When I commented on the original answers, I likened Microsoft's answer to Candy Crush--explosive in a sweet and smooth way--and ABK's to Call of Duty (frontal assault, but with high precision). The defenses, however, were the same, and will again be identical.

I took note of the constitutional challenges and may have been the only commentator so far to put them into the context of the Axon Enterprise, Inc. v. Federal Trade Commission case that is currently being adjudicated by the Supreme Court. As I have commented very favorably on the FTC's work in many instances, even including an entire month-long trial in San Jose four years ago, I'd just like to see the FTC make the right decisions in each case and set the right priorities, while some (especially a few Republican politicians) would like to abolish it.

Lawyers--outside and in-house counsel alike--have a duty to identify and develop all potential defenses, and when there is the possibility (based on how the Axon hearing went) of the conservative SCOTUS majority calling the FTC's in-house adjudicative proceeding into question, it's a natural thing for defendants to do to preserve their rights. But the basis on which the case should be decided is simply its own merits.

What is not known is whether Microsoft and Activision Blizzard (after internally agreeing to drop those defenses) then just asked the FTC whether it would oppose such a motion, or whether this is a harbinger of a thawing period between the agency and the private parties. Whatever the climate may be, the fact that such defenses were raised at all shows that the FTC must act prudently. A forceful but reasonable FTC will continue to have the support of centrist politicians and (enough) Supreme Court judges, but an exceedingly aggressive one that tilts at windmills may end up shooting itself in the foot, or worse.

As an app developer, my number one wish is for the FTC to realize the potential of Microsoft-ActivisionBlizzard to put a serious competitive constraint on the incumbent mobile app stores (initially in jurisdictions like the EU with its Digital Markets Act, and at some point also the U.S.). Regardless of whether one shares the FTC's concerns over the impact of the transaction in question on some other markets, I think the merits of the procompetitive argument concerning mobile app stores are beyond reasonable doubt and perfectly reconcilable with the FTC's mandate, so I can't see why the FTC couldn't recognize that fact as well and figure out a solution. The only beneficiaries of a decision to block that transaction are console market leader Sony and the mobile app store monopolists.

While I'm an independent app maker, I can very much relate to the interests of software companies' employees, too. Bloomberg Law published an interesting article (also yesterday) about the Communications Workers of America (CWA) labor union continuing to support the deal. The article also mentions that approximately 300 workers at ZeniMax studios (mostly game testers, I believe) just unionized.

Over in the United Kingdom, the Competition & Markets Authority (CMA) yesterday gave notice (PDF) of an extension of the deadline of its Microsoft-ActivisionBlizzard inquiry from March 1 to April 26. That's almost two months, but the agency "aims to complete the inquiry as soon as possible and in advance of this date."

The reasons given for this delay include--among others--"a large volume of evidence as well as main party and third party submissions." It was interesting to see that, despite Sony making so much noise about why the deal is allegedly bad for PlayStation gamers and the PlayStation having a far larger installed base than the Xbox, 75% of the answers actually support the transaction (in that post I explain why the result should neither be over- nor underrated). That also applies to the only published submission by a large third party, apparently another game maker.

Earlier this week, Microsoft's lead counsel in the FTC case said that her client was hopeful to work out solutions in the EU and/or UK in the near term, and would then propose the same set of remedies to the FTC as well. The CMA's notice of extension doesn't say that remedies have been proposed, but it is simply a fact that merger reviews take longer when that is the case, so this may have contributed to the extension. At least it's a plausible assumption when connecting the dots between the FTC hearing and the CMA notice.

The stock market didn't react negatively to the UK announcement (the NASDAQ:ATVI stock moved sideways), which shows that professional risk arbitrageurs don't feel it portends a prohibition decision.

All of yesterday's news taken together suggests to me, too, that the plausible explanations for what happened are pretty much in the range from "normal course of business" to "detente on more than one front".

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Microsoft-ActivisionBlizzard remedies to be agreed upon in EU and/or UK will be proposed to FTC: first hearing held in U.S. adjudicative proceeding

The Federal Trade Commission's Chief (and currently only) Administrative Law Judge, D. Michael Chappell, just held a telephonic hearing in the adjudicative proceeding brought by the FTC against the acquisition of Activision Blizzard by Microsoft. There were some technical issues as far more people--many of them presumably risk arbitrageurs and members of the legal community--wanted to dial in than they had anticipated. I agree with Judge Chappell that the AT&T operator appeared to handle the situation well under the circumstances.

The hearing was short and procedural as opposed to evidentiary. Just a few points:

1. FTC staff attorney James Weingarten said there was no parallel proceeding in district court at this stage and there were no plans at this time, but the FTC may seek to block the transaction in the future depending on how things progress.

2. It seemed to me that the FTC is not giving more than lip service at this stage to the possibility of working out a settlement. But it appears that at least the lawyers for all three parties (FTC, Microsoft, Activision Blizzard) are in a position to reach agreements on scheduling questions.

3. Microsoft's lead counsel Beth Wilkinson mentioned the July 18, 2023 termination date in the meger agreement and said her client was "preparing for all options." While "a resolution would be ideal," the other options include an in-house FTC trial or a trial in federal court, where Microsoft anticipates the FTC may have to run pretty soon.

4. Mrs. Wilkinson made reference to a number of regulatory reviews in different jurisdictions, some of which have already cleared the deal (most recently Chile), and expressed hopes of receiving clearance in each of them over the next few months.

5. She placed particular emphasis on the processes in the European Union and the UK, where there appears (as far as I understood it) to be a possibility of near-term settlements, and the remedies agreed upon with the European Commission and/or the Competition & Markets Authority will then also be proposed to the FTC.

6. Microsoft's counsel exuded confidence as well as a constructive attitude. Activision Blizzard's counsel--parts of whose answer to the FTC's complaint were belligerent--had nothing to add. But again, this was just a case management conference and not about the merits, so there wasn't much to be said.

A scheduling order will issue shortly.

I saw a recent report according to which some Brussels observers believe the European Commission will issue a Statement of Objections (SO) this month, but that a settlement could fall into place thereafter.

In related news, various articles have appeared over the past 24 hours or so that suggest Microsoft is unreasonably denying knowledge of the release date of Activision's Call of Duty title. I tweeted about one of them:

I disagree with @verge on this: it's Activision Blizzard's job--not Microsoft's--to admit or deny what the FTC alleges with respect to Activision Blizzard. Guys, read BOTH filings, not just 1

Also it's obvious that Microsoft simply wants to close the deal, as opposed to stalling https://t.co/YvVo7S3S9n

— Florian Mueller (@FOSSpatents) January 3, 2023

I commend Matt Stoller for having raised a number of Big Tech issues over the years, and The Verge for its efforts to cover certain tech competition issues in depth, but in this context they--and those who echoed their views--were simply wrong. The mistake they made was to expect Microsoft to comment on something that concerned Activision Blizzard. Microsoft simply can't make an admission on Activision Blizzard's behalf, and there is a reason why parties have the choice not only between admitting or denying, but also declining (where appropriate) to take a definitive position.

The answer is simply in Activision Blizzard's filing. Paragraph 6 of its Specific Responses to the Commission's Allegations contains the following passage:

"Activision denies the allegations of the second sentence of Paragraph 6, except to admit that it released the first entry in the Call of Duty franchise in 2003 and that it has released at least one installment in the Call of Duty franchise every year since 2003." (emphasis added)

There is nothing "petty" or "bizarre" here: Activision Blizzard confirmed the release date, and it would have added no value at all if Microsoft had done so as well.

It may have been tempting to engage in "clickbaiting" at a time when there's a shortage of tech industry news, but I would strongly recommend to some commentators and reporters to read both Microsoft's and Activision Blizzard's filings in the FTC case before blaming one for not addressing something we may be able to find in the other.

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Microsoft's response to FTC lawsuit feels like Candy Crush, Activision Blizzard King's filing more like Call of Duty as deal parties challenge Federal Trade Commission's merger complaint on law, facts, constitutionality

Late on Thursday, both Microsoft and Activision Blizzard King filed their responses to the administrative complaint the Federal Trade Commission (FTC) brought against the $69B merger two weeks ago. On December 8, the U.S. federal government agency decided to sue for the sake of suing, meaning that neither was there a need (given the acquirer's willingness to address any potential concerns) nor a case (investors certainly weren't impressed). Instead of filing a complaint with a federal district court, the FTC opted for an "adjudicative proceeding" before its own in-house judge. The response deadline is two weeks from formal service, which may have occurred the day the FTC made its decision.

Way past East Coast office hours, the parties' responsive pleadings were not yet available on the FTC's website, but showed up on the Internet (particularly CNBC). For convenience, let me show the two documents first and then compare them:

In the Matter of Microsoft Corp., a corporation, and Activision Blizzard, Inc., a corporation: Answer and Defenses of Respondent Microsoft Corp.

In the Matter of Microsoft Corp., a corporation, and Activision Blizzard, Inc., a corporation: Answer and Defenses of Respondent Activision Blizzard, Inc.

Each complaint has three parts: introduction, item-by-item denials and admissions, and (partly affirmative) defenses. The introductory parts are where the two answers to the complaint differ the most. If one wanted to use the old "good cop, bad cop" analogy, Microsoft would be the former and Activision Blizzard the latter. That categorization would be justifiable, but it's more instructive--and more fitting in this context--to draw analogies to famous games:

• Microsoft's filing is sweet and strategic like Candy Crush:

  • As we've heard from Microsoft ever since the announcement of the deal (almost a year ago), it is primarily about Microsoft becoming a major mobile game publisher (and, through a third-party app store, distributor, though some other jurisdictions may be ahead of the United States in that regard after Congress just failed to pass the Open App Markets Act into law).

  • Microsoft's counsel from Wilkinson Stekloff and Weil Gotshal & Manges does take firm positions on the legal and factual questions in the case (and makes it pretty clear that the FTC is protecting a competitor--Sony--as opposed to the competitive process), but stops short of being exceedingly combative. It's the "sweet" non-bridge-burning way to strongly disagree with a government agency.

  • It reads like someone strategically arranging candies of the same color in a row and then watching the whole thing implode.

• Activision Blizzard King's filing is frontal assault like Call of Duty:

  • The introductory part of ABK's answer to the complaint (lead counsel: Skadden's Steven Sunshine) is replete with take-no-prisoners mince-no-words rhetoric like "ideologically-fueled", "facially absurd", "made up", "entirely nonsensical", "wildest supposition", "contrived", "turning antitrust on its head", "[b]linded by ideological skepticism of high-value technology deals", "lost sight of the realities". I was pleased to see that ABK called the FTC's proffered market definitions "gerrymandered" just like I did in my analysis of the agency's complaint two weeks ago. It shows that this is a natural conclusion.

  • Make no mistake: it's not just noise. They take aim at the different targets, as precisely as a sniper, and strike down one after the other.

There are good reasons for which the two companies strike a different tone. All that Activision Blizzard King wants to do is close the deal. Then ABK will cease to exist as an independent entity, and Microsoft will be in charge, which is why it's up to Microsoft to negotiate a potential settlement based on commitments it would make. Yesterday the New York Times published an interesting article on Microsoft's approach, Microsoft Gambles on ‘Nice Guy’ Strategy to Close Activision Megadeal. The NYT notes that Microsoft can't just let the FTC block any of its deals as it may want to make more acquisitions, but strives to be constructive. When I read that headline, I can think of another headline I'd like to--but at least in the foreseeable future probably won't--see: "Apple Gambles on 'Nice Guy' Strategy to Open its App Store" There is a stark contrast now between Apple--which uses fake app developers as well as fake labor unions--and Microsoft--which is reasonably aligned with the Communications Workers of America (CWA) labor union as well as the AFL-CIO umbrella organization (which totally supports the deal).

Back to the Microsoft-Activision comparison:

To the extent that the middle sections of the answers to the complaint differ, it's mostly because the parties have different knowledge. Microsoft can comment more specifically on its Xbox gaming division and plans, while ABK is in the best position to talk about what it would do in a "but-for" scenario where it would stay independent, such as that there simply wouldn't be any of its games on any subscription services anytime soon (while Microsoft's cross-platform Xbox strategy is to make more games available to more gamers as they call it).

The defenses are identical, and while large parts of them were to be expected, they must have been coordinated between the parties' lawyers. We may see a motion to dismiss fairly soon as the parties have identified legal deficiencies, including but not limited to market definition. But looking beyond an adjudicative proceeding (should the FTC see it through instead of working things out along the way), the parties clearly also reserve their constitutional rights, particularly under Article II (separation of powers, unaccountability of FTC), Article III (access to an independent federal judge), and the Fifth Amendment (due process). The FTC is taking some risks here. Its in-house adjudicative proceedings are somewhat controversial, and the Supreme Court is now working on its Axon Enterprise, Inc. v. Federal Trade Commission opinion. In that case, the key issue is whether constitutional challenges to the FTC's structure, procedures, and very existence--all of which are referenced in Microsoft's and Activision Blizzard King's responsive pleadings--can be brought in district court.

At some point the FTC would have to sue in district court anyway: whenever they feel the time has come to seek a preliminary injunction. Otherwise the parties could just close the deal. I have serious doubts as to the FTC's ability to satisfy the requirements for a PI, above all the likelihood of success on the merits. And a federal district court--the United States District Court for the Northern District of California (barring a hypothetical venue transfer)--will soon have to decide on a PI motion concerning the deal, but one that was brought by class-action lawyers whose pursuit of fees is a sideshow that could, however, further weaken the FTC.

As some commentators have noted, the FTC may also become more receptive to an amicable resolution should there be consent decrees in other jurisdictions--particularly in Europe, where antitrust laws tend to be stricter than in the U.S., and where regulators have repeatedly been accused by U.S. officials and companies of protecting competitors rather than competition, which is precisely what the FTC now appears to be doing. I was unhappy when a European Commission official gave the impression of doing one of the things Microsoft and Activision say the FTC has done ("prejudged the case"), but still believe that the EC's Directorate-General for Competition (DG COMP) is likely to arrive at a realistic assessment of the transaction. And in the UK I found it interesting that public comments on the merger were overwhelmingly positive (in that post I explain why that evaluation of submissions by members of the public should neither be overrated nor underestimated, much less ignored).

The answers to the complaint are unlikely to have surprised the FTC, but the FTC's decision makers should still think about whether it is a good idea--even if there could be indirect benefits such as another argument for new antitrust legislation--to complicate a U.S.-U.S. deal when, as Activision Blizzard's answer to the complaint says, "China-based gaming companies have been aggressively expanding in the U.S. by investing in U.S. gaming companies (e.g., Tencent's 40% stake in Epic Games, developer of Fortnite) and funding start-up gaming studios, all while enjoying protected access to the largest revenue opportunity in gaming at home in China." That passage calls into question that the FTC is doing the right thing even from a purely political point of view. The following two sentences from Microsoft's filing should also give the FTC pause:

"[A]fter nearly a full year investigating this transaction, receiving millions of Microsoft and Activision documents, and speaking to over a dozen witnesses, there is no evidence that Xbox intends to take Call of Duty away from PlayStation—or any platform at all. No emails, no text messages, no testimony."

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'Consumer' lawsuit over Activision Blizzard acquisition more likely to complicate things for FTC than for Microsoft

It is, admittedly, counterintuitive that a lawsuit against a merger may ultimately be better news for the deal than for a party--here, the Federal Trade Commission (FTC)--that is already litigating against the same transaction. But only because something is counterintuitive does not mean it's necessarily wrong. The only thing that is definitely wrong is to believe that the existence of a lawsuit that only has the potential to benefit lawyers tells us anything about genuine consumer concerns, though some journalists either don't understand the legal services business well enough or aren't sufficiently confident of their analysis to tell their readers the plain truth. But I will do just that. It's party of my differentiation strategy from mainstream media.

So, on Tuesday, two San Francisco-based class action law firms--the Alioto Law Firm and the Joseph Saveri Law Firm--brought a complaint on behalf of ten private citizens against Microsoft over its $69B purchase of Activision Blizzard (NASDAQ:ATVI). For the avoidance of doubt, that case is not--at least not yet--a class action, but whether or not certification will be sought later (and whether it would ever be granted in that case), it's a class action by any other name:

Even if you brought together not just 10 gamers but even the 1,000 or 10,000 most avid gamers in the United States, and if you then--for the sake of the argument--took at face value the most absurd projections of how much more they'd end up spending on games as a result of the challenged transaction, their collective spend on video game hardware and software wouldn't make it even remotely cost-efficient to pursue an expensive federal antitrust lawsuit under the Clayton Act in an attempt to block that transaction.

However, if you're in the class-action business--again, let's not look at it in formal but in economic terms, and in that regard it is the equivalent of a class action--and you aren't already busy with stronger (and likely more lucrative) cases and/or you're interested in publicity, then the gamble may be worth it even if you realize your chances of success are slim. You just spend your time, and you can hope that even if your case is going nowhere, a megacorp defendant may at some point be willing to pay you off to go away, even if only because of the "nuisance value" (the cost of a proper defense) of your lawsuit.

Simply put, whether a class action law firm brings a complaint is a mix of risk-reward considerations such as

• the size and financial strength of the defendant,

• the hypothetical magnitude of the matter,

• the amount of time it takes the class action lawyers to pursue the thing (piggybacking on a government lawsuit saves a lot of time),

• the lawyers' opportunity costs,

• the "business development" value of the case, and

• the likelihood of success, which is often a very low-priority question. Some class actions have a lot of merit, while others are total crapshoots.

In June, Elon Musk tweeted something that I've quoted before:

The press always plays along with the class-action law firms, who are the real plaintiffs, not the puppets they find to masquerade as such. Why is this?

— Elon Musk (@elonmusk) June 4, 2022

That tweet isn't entirely wrong, but I would like to distance myself from it in at least three ways:

1. Not all class-action plaintiffs are "puppets." Generally speaking, however, "consumers" and small companies that lack the wherewithal for high-stakes litigation, can't realistically expect a bottom-line positive outcome from a case, and typically aren't in a position to form their own opinion on the chances of a case, are going to adopt pretty much any advice they get from the class-action lawyers. And the class-action lawyers are then the ones who really invest in it, and who stand to gain something: they're the economic center of gravity as opposed to a service provider.

2. Mr. Musk's tweet could be understood--and I'm not saying he was insinuating anything, but the brevity of a tweet easily gives rise to misunderstandings--as a conspiracy theory. The problem is, however, what I wrote further above: some journalists just don't figure it out, and some others actually do have an idea but they lack the courage to just spell it out. It is, of course, disappointing that even highly reputable news agencies with reasonably specialized reporters fail to give their readers the necessary context, so I can easily see Mr. Musk's frustration that led to that kind of media bashing. The press could indeed do a far better job in its coverage of class actions.

3. Sometimes class actions do have very positive effects even from a public-interest perspective, such as Pepper v. Apple, an App Store antitrust case that made it all the way up to the Supreme Court.

In the wake of the FTC's complaint (which is now before its in-house Administrative Law Judge) against the transaction (see my previous commentary: 1, 2, 3), the class-action law firms I mentioned further above brought their complaint--and a motion for a preliminary injunction--in the Northern District of California. Here are the two documents (followed by further commentary):

Dante deMartini et al. v. Microsoft Corporation Complaint to Prohibit the Acquisition of Activision Blizzard by Microsoft corporation in Violation of Section 7 of the Clayton Antitrust Act, 15 U.S.C. § 18 (Northern District of California, case no. 3:22-cv-08991)

DeMartini et al. v. Microsoft (N.D. Cal., case no. 3:22-cv-08991): Motion for Preliminary Injunction

At first sight I don't see that complaint having any more substance than the FTC complaint, and to the extent the class-action lawyers deem Microsoft's 10-year Call of Duty offer insufficient, there's no reason to believe they actually know all of the terms of that offer.

What's more interesting than the substance of the case--or, actually, lack thereof--is the procedural impact.

Let's start with the forum choice. The most obvious venue to sue Microsoft would be the Western District of Washington. Activision Blizzard is mostly in the Central--not Northern--District of California. It's just that those class-action lawyers are based in San Fran, and the Northern District is generally popular among antitrust plaintiffs, though what happened in Epic Games v. Apple certainly didn't validate that thinking.

If the FTC had decided to sue in federal court, there's no way that it would have done so in the Northern District of California. But the FTC didn't want to go to federal court at all, and instead brought a case before its in-house court, where defendants prevail maybe once every 25 years, though such statistics don't mean much when a complaint is as weak as in this particular case. Also, the in-house decision isn't the last word: there can always be an appeal.

Now, the FTC's in-house case doesn't prevent the parties from simply closing the deal. If the FTC wants to block the deal, it needs a preliminary injunction from an Article III court. Sources (presumably from inside the FTC) apparently told some reporters that they were concerned about seeking a PI at a stage where the consummation of the transaction wasn't imminent due to critical approvals outstanding in other jurisdictions such as the EU and the UK. That fact may indeed be held against the class-action lawyers' PI motion now, though I would much prefer the district court to deny the PI for a likelihood of success on the merits in the first place. With prejudice in that case. But it's also a possibility that the FTC simply knows how weak its case is in legal terms--they're trying to protect a market leader against a scenario for which Microsoft proposed a structural solution in the form of a long-term license agreement--and is actually afraid of putting its case before an independent judge.

The FTC now faces the choice of how to respond to the fact that some class-action lawyers brought a PI motion. It may just elect to sit on the sidelines and watch what happens. It may also feel that it shouldn't let some federal court--even if a denial of a PI motion in the Northern District of California wouldn't be binding on other district courts--state an opinion on the merits (or, more appropriately, lack thereof) before the FTC even gets started. Also, the FTC knows that whatever happens in federal court, on a very different schedule, has the potential to impact is in-house adjudicative proceeding.

The FTC knew from the beginning that some class-action lawyers would bring a case in federal court (and that those class-action lawyers, unlike the FTC, can't put the case before their in-house judge). The FTC also knew that some class-action lawyers could file a PI motion. Therefore, the FTC is unlikely to do more now than, at most, file an amicus curiae brief in California at some point.

Even though private class-action lawsuits (and I repeat myself again by pointing out that this is not formally--but practically and economically speaking--a class action) are virtually always filed by some lawyers trying to jump on a government plaintiff's bandwagon, I don't think it's a good thing from the FTC's perspective that it has happened here. In other words, it was expected, but it's still bad news for the FTC, especially because of the PI motion that means some things may happen pretty quickly in California.

What the FTC and those class-action lawyers have in common is that they're gamblers betting on a case that has less merit than your average long shot. The commissioners and the FTC staff are way too smart to believe that they have a case. They're suing for the sake of suing. as I've said in a couple of previous posts, and their calculus may be that a defeat would be useful. It would be seen as embarrassing, but nothing is really embarrassing if you just don't care. The "useful" element here would be that the FTC may just want to use a courtroom defeat as an argument for some legislative measure giving it more power. And the class-action lawyers may believe that there's still a pretty good chance of making some money on this even if their case goes nowhere.

For Microsoft, this is an opportunity to get the class-action lawyers' PI motion denied in a way that will expose the weaknesses of the FTC's complaint. The case will be assigned to a district judge shortly, and some judges in that district are really, really good. While most district judges keep their denials of PI motions short, this is a high-profile case, so there is a possibility of an order denying the motion for a preliminary injunction making the strongest case against the case against Microsoft-ActivisionBlizzard.

We may now also see some other class-action lawyers scrambling to bring their own Microsoft-ActivisionBlizzard cases as soon as possible in order to potentially earn some fees as well. Should there be cases in two or more federal districts, there might be venue transfer motions and they could all get consolidated in one place.

But before anything important--other than the assignment of the case to a district judge--happens in the Northern District of California or any other federal district court, we'll see Microsoft's response to the FTC's complaint. The deadline is two weeks from service of process. What I don't know is whether Microsoft was formally served on the day the lawsuit was announced. In that case, the deadline would be tomorrow; otherwise, it won't take long. At the latest, it would have to be next week as Microsoft's counsel--whose most famous courtroom victory got the "Oklahoma Bomber" sentenced to death--entered her appearance on last week's Wednesday.

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Microsoft's lead counsel in FTC case over Activision Blizzard acquisition successfully argued for execution of Oklahoma Bomber McVeigh

On Thursday, the Federal Trade Commission (FTC) filed its complaint over Microsoft's acquisition of Activision Blizzard King, though the alternative would have been a consent decree. Today, Microsoft's counsel gave notice of appearance (PDF): four lawyers from the DC head office of Wilkinson Stekloff.

Microsoft's lead counsel is the firm's founder, Beth Wilkinson, who has an impressive background in litigation, including high-stakes multi-billion dollar cases as well as criminal cases. As a trial lawyer at the Department of Justice, she represented the United States against Oklahoma bombers Timothy McVeigh and Terry Nichols.

In June 1997, the Los Angeles Times described how Mrs. Wilkinson convinced the jury in the government's closing argument that the death sentence was appropriate in that particular case:

Prosecutor Beth Wilkinson turned toward McVeigh and in a voice cracking but loud enough for the jury to hear said: "Look into the eyes of a coward and tell him you will have courage. . . . Tell him he is no patriot. He is a traitor and deserves to die."

The jury agreed, and a few years later, McVeigh was executed.

For her work on that domestic terrorism case, Mrs. Wilkinson was awarded the DOJ's Exceptional Service Award for a second time (no one before her had received it twice).

A profile on the website of her alma mater--Princeton-- points out, however, that Mrs. Wilkinson also "served as Co-Chair of the Committee to Reform the Death Penalty, 'a nonpartisan group that worked to initiate reforms to the death penalty around the country.'"

There are three more Wilkinson Stekloff partners appearing on Microsoft's behalf: Rakesh Kilaru, an experienced antitrust litigator; Kieran Gostin, a former DOJ trial counsel; and Grace L. Hill, who like Mrs. Wilkinson once practiced criminal law but has more recently handled civil litigation, such as "preparing a tech company’s C-suite executives to testify in an FTC investigation."

Microsoft's filings with the UK Competition & Market Authority (CMA) bear the logo of one of America's largest and most famous firms, Weil Gotshal & Manges.

The FTC's primary challenge, however, is not Microsoft's legal team, no matter how impressive its background may be. It's that the complaint fails to convince observers. Moreover, Microsoft is prepared to alleviate any concerns over vertical foreclosure, even with respect to multi-game subscription services. Sony is the undisputed market leader, and Microsoft President Brad Smith noted that "the Administrative Law Judge is going to have to decide whether going from 59 to 60 [Xbox-exclusive games] is such a danger to competition that he should stop this from moving forward," considering that there are 286 PlayStation-exclusive games--and that Microsoft is actually prepared to extend a 10-year license to Sony.

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Microsoft's ten-year Call of Duty offer to Sony includes subscription services, eliminating key concern of some antitrust enforcers over Activision Blizzard acquisition: Bloomberg

Bloomberg has just reported something that further increases the likelihood of regulatory approval of Microsoft's $69B acquisition of Activision Blizzard King: Microsoft's offer to keep Call of Duty available on Sony's PlayStation also includes that Sony may add the game to its subscription service.

Sony is the only vocal complainant. The leading gaming console maker argues that Microsoft would later engage in vertical foreclosure, claiming that Call of Duty is a must-have title and that hardly anyone besides Activision Blizzard can make "AAA" titles at all. Apart from that argument not making economic sense--as a think tank explained--Microsoft is ready to extend a ten-year license to Sony, but Sony's only desire is to torpedo the transaction.

In last week's FTC complaint as well as statements by other competition authorities, vertical foreclosure theories are not limited to video game consoles but also involve subscription services. In my analysis of the FTC complaint, I criticized a market definition that focuses on how gamers pay (such as a monthly $10-20 fee for access to multiple games vs. "freemium"--which most online games are--or a one-time purchase price of typically $60-70 for console games). In any event, some observers believe that regulators may be even more concerned about competition among multi-game subscription services than in the console market.

The fact that Microsoft is prepared to make a far-reaching concession with a view to subscription services ups the pressure on Sony. Competition authorities can't withhold clearance (much less litigate for many months) when the key complainant is simply not being constructive and continues to refuse a deal that would actually address the stated concerns.

Investors were underwhelmed by the FTC complaint, and today ATVI's stock price gained approximately 3%, largely because of the Bloomberg article on Microsoft's preparedness to make Call of Duty available to Sony's subscription service. But this was not the only piece of good news for the transaction: the UK Competition & Market Authority (CMA) published the response (PDF) of a "Market Participant A" to its Issues Statement. That company--presumably a large game maker--explains that--and why--Microsoft's acquisition of Activision Blizzard is procompetitive, with the submission specifically also mentioning Microsoft's app store plans. That company declares itself in support of reasonably strong competition enforcement in the technology industry, and generally--with just this exception here--welcomes the CMA's approach to the technology industry. (As do I.)

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FTC complaint over Microsoft-ActivisionBlizzard is so weak that ATVI is trading at pre-lawsuit level and European Commission clarified that Microsoft didn't walk back on any ZeniMax/Bethesda commitment

I'm not one of those antitrust minimalists who would even like to abolish the FTC (in terms of reintegrating it into the DOJ Antitrust Division). That's why I'm even more disappointed in what's going on now, with the FTC wasting resources and losing credibility only because of some decision makers' desire to be seen as boldly anti-Big Tech. And it isn't even really anti-Big Tech because Microsoft's proposed acquisition of Activision Blizzard (NASDAQ:ATVI) has the potential to contribute enormously to a level playing field in mobile app distribution, ultimately benefiting the little guys.

The following chart shows how Activision Blizzard King's stock has moved in the aftermath of the FTC decision on Thursday afternoon:

ATVI was at approximately $75 when the FTC meeting finished. It temporarily went down after the decision leaked and was then formally announced. After trading hours on Thursday, the public redacted version of the complaint became available. If that one had contained a smoking gun or an impressive legal theory, ATVI would have tanked further. Not so: on Friday it basically returned to where it was before the decision (with only a minor after-hours adjustment). Wall Street largely expected that decision, but again: the complaint fails to convince analysts.

Yesterday I explained various shortcomings of the FTC complaint. Some people may believe that the FTC isn't going to district court yet to obtain a preliminary injunction (which it needs because the transaction could otherwise just be consummated regardless of pending litigation) because the merger is still being reviewed in other jurisdictions whose approval is required, and that may be a factor, but if and when the FTC tries, how can it possibly show a likelihood of success on the merits? Of course, the shorter the period between the PI motion and the expected resolution of its in-house adjudicative proceeding (with an evidentiary hearing (i.e., trial) scheduled for August 2) is, the better the chances that the district court will give less weight to the likelihood of success on the merits--but if the district court sees practically no merit in the case, how can a judge enjoin Microsoft and Activision Blizzard even for a short period of time?

Here's a recording from Jim Cramer's CNBC show where they talk about investor sentiment:

The key points are that the complaint is weak (as this blog said), that there is no economic data or analysis (this blog also noted that there is no theory of harm and the allegations are unsubstantiated), and that the FTC is going to lose. There also isn't too much concern over the EU process as Wall Street believes the European Commission will approve the deal with some remedies. The big question mark is the UK Competition & Market Authority (CMA), whose decisions--they say--are harder to appeal. Again, I wish to emphasize that this depends on the merits. It's yet easier to overturn a baseless CMA decision than a well-considered DG COMP or FTC ruling.

Not only is the FTC coming across as a regulatory agency that doesn't prioritize the legal merits of a case but there is even a risk of the FTC being exposed as a source of fake news. Having live-tweeted from a lengthy FTC trial in 2019, where the FTC staff did a really great job, I'm dismayed.

There are various articles out there now (example: wccftech, Microsoft Didn’t Lie to the EU on ZeniMax Deal Like the FTC Said, According to Sources) that report on a clarification the European Commission provided to the MLex subscription service, which apparently wanted to know whether it was true that Microsoft reneged on what it had promised the EC in connection with the acquisition of ZeniMax/Bethesda Softworks. In yesterday's analysis of the complaint, I explained that the FTC hasn't lied here--but it is fair to say that the FTC, which is hard pressed to find any argument for blocking a totally lawful and even procompetitive merger, has misled a lot of people into thinking that Microsoft walked back on a promise on which the clearance of a previous game studio acquisition depended.

Microsoft published a document (PDF) that explains what exactly happened around that acquisition: Microsoft kept its word.

The EC apparently pointed out that Microsoft's acquisition of ZeniMax/Bethesda was cleared unconditionally. If there were no commitments that the approval of the deal hinged on, Microsoft obviously couldn't renege on any in the first place. The clearance decision did not even rely on any informal commitments (public statements). The Commission simply found that the games industry would still be fragmented enough after the deal that other platforms would not have a shortage of input in terms of game titles.

In an earlier post I already showed the following table from a Microsoft filing with the UK CMA concerning its track record with ZeniMax/Bethesda titles on PlayStation (click on the image to enlarge):

All that the FTC can reasonably say is that a minority of Microsoft game titles in the future may still be Xbox exclusives--which Call of Duty won't be as a 10-year deal with Nintendo is in place, a similar commitment regarding Steam was made (and Steam operator Valve doesn't see a need to contractualize it as it knows it can rely on Microsoft), and Sony has a standing ten-year offer.

Instead of telling things in a way that no reasonable person would be likely to misunderstand, the FTC acted irresponsibly. For litigation purposes, it created a false impression that appeared to be an allegation or at least insinuation, and which threatened to hurt Microsoft's reputation. The FTC's mission is "protecting America's consumers" as opposed to "damaging America's companies"...and now the European Commission has to protect a major American company's reputation against the FTC. That's counterintuitive to put it diplomatically.

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FTC's Microsoft-ActivisionBlizzard complaint misleads about Bethesda post-acquisition history and reminds of Apple Arcade antitrust class action dismissed in Northern District of California

Over the years, and especially over the past couple of years, this blog has commented on a number of antitrust complaints--but also on a similar number of motions to dismiss such lawsuits. Seen through that lens, the FTC's complaint In the Matter of Microsoft Corporation, a corporation, and Activision Blizzard, Inc., a corporation (PDF) comes across as anemic from start to finish, unusually repetitive for such a short document, and generally unsubstantiated. It is no better than I expected when commenting on the FTC's announcement.

Reading the thing made me feel sorry for the staffers who were ordered for purely political reasons to make something out of thin air. They must have had to swallow their pride in authorship and quality legal work, which I have no doubt they would be capable of performing if only they had a case.

Not long after I finished reading, I felt eerily reminded of another antitrust complaint involving games, platforms (iOS), and even the subscription model (Apple Arcade): Pistacchio v. Apple. That one was dismissed in the Northern District of California never to be seen again. At the motion-to-dismiss stage, I expressed doubts about that complaint surviving the motion to dismiss and voiced concerns that it might "simply have been an overly ambitious and somewhat premature case"--while I viewed other App Store-related complaints far more favorably at the same stage.

The two primary shortcomings of the Pistacchio lawsuit also apply to the FTC's "case" against Microsoft's purchase of Activision Blizzard King:

• Gerrymandered market definition:

  That one deserves some attention because an antitrust claim premised on the wrong market definition is doomed.

  • "Microsoft and Sony control the market for high-performance video game consoles." That would be an interesting collective dominance claim, but not in that order as Sony is far ahead and may temporarily just be affected by chipset shortages. The FTC does not state any objective criterion for the alleged difference in performance. Frames per second? CPU cycles? They point to Nintendo charging less for its product, which can have any number of reasons including Nintendo's challenges in competing with Sony. Tesla also charged less than Ferrari despite accelerating a lot faster.

    They came up with "performance" as a differentiator because paragraph 68 of the complaint can't substantiate a clear delineation by audience. The claim about "more mature content for more serious gaming" is something that with my games industry background (once the first person to work for Blizzard outside the United States) and my own experience playing games I have to reject: it's just not true that mature content implies or fosters serious gaming. There is no mature content in chess, yet it is serious; and at the end of a recent post I showed my Candy Crush level map (well over level 1,400). I guarantee you that it took "serious gaming" to get there. I would encourage the FTC to play Supercell's Hay Day up to the point where one can join a "neighborhood" and participate in "neighborhood derbies" in a multi-league system. That's where one can see and meet many people who basically let a farming game dictate their schedule to an extent you would be hard-pressed to find on Call of Duty.

    By contrast, non-serious games with mature content are about as old as gaming itself. Here's one example from 1983. The school-shooting game that passed Apple's app review just weeks after the Parkland rampage (mentioned here) was brutal, but presumably not a "serious" challenge for gamers.

    Anyway, there is plenty of mature content for the Nintendo Switch.

    If one can arbitrarily limit a market with three players to a two-horse race, one can also come up with some reason to claim that one of them has a monopoly. That would be Sony, the only vocal complainant...

    In another fit of pity with FTC counsel, I feel they just didn't have the chance to rethink (or simply abandon) their litigation strategy after Nintendo signed a 10-year Call of Duty contract with Microsoft. Nintendo is actually competing in that market (and even if it was only considered a potential new entrant into an arbitrarily defined segment, it couldn't just be ignored as long as Nintendo keeps trying).

  • What's even a lot worse--and even more reminiscent of one of the deficiencies that doomed Pistacchio v. Apple--than "high-performance video game consoles" is the part about "AAA games." There, again, the FTC presents no objective criterion. In the end, it's about budget. Actually, games like Candy Crush and Minecraft became extremely successful despite (at least initially) small budgets. Consumers do not care about game makers' budgets (and often wouldn't even be able to tell whether one game costs more to make than another); they want to have fun. That's why it's not a suitable market definition, and if the courts of law accepted it, it would set a dangerous precedent (which is why they won't do it).

    The FTC complaint does not explicitly designate AAA games as a relevant product market, but the way the concept is referenced throughout the complaint--dozens of times--is tantamount to a market (or industry) definition.

  • "Multi-Game Content Library Subscription Services" as a market definition is strikingly similar to the "iOS Subscription-Based Mobile Gaming Services Market" at the center of the failed Pistacchio complaint. Apple--a company I don't often agree with--successfully argued that you cannot define a market "by the way that users pay for it: a subscription fee." Apple gave various examples in that case for courts rejecting such approaches.

• Prediction of future relevance of nascent product category:

  The FTC seeks to justify its complaint that has no basis in merger law as it stands with the need to take risks at "a pivotal time for the industry." Recognizing that "[t]oday, video game software typically runs locally on the player’s gaming device," the FTC then points to marketing statements and visions according to which cloud gaming is going to be huge somewhere down the road.

  In Pistacchio, the problem was that Apple Arcade had not been around for long enough to really substantiate anticompetitive harm. Of course, in merger reviews the question is not what happened in years past but whether there is a reasonable apprehension of a substantial lessening of competition. That standard is lower than in a unilateral conduct or cartel case, but it is not low enough that regulators can block transactions based on the mere prediction of a fundamental change of consumer preferences. If that became the standard, one could block pretty much any acquisition of an Artificial Intelligence company these days.

  I have traditionally--since my opposition to Oracle's acquisition of Sun Microsystems in 2009 (because of the MySQL open-source database)--been in favor of considering the potential of nascent competitors in a merger context. In that regard, I think the current FTC and I have similar views. But when a nascent product category has not had much appeal beyond a niche, and when even Fortnite isn't a smash hit as a cloud gaming title because most people would only want to play it locally, it's very, very difficult to make a case against a merger.

In an antitrust litigation in a federal district court, the FTC's complaint would be very likely to be dismissed for market definition reasons alone, and the exceedingly speculative perspective on the supposedly bright future of cloud gaming would be another ground for dismissal. But I will now share some other observations:

• As I already explained in yesterday's post, the FTC's reference to what happened after Microsoft's acquisition of ZeniMax/Bethesda is weak. Like those gerrymandered market definitions, it reflects the bankruptcy of the FTC's theory, but in one way it's even worse: the FTC is playing a political game here and trying to mislead those who read the complaint, such as journalists. If one doesn't know some additional facts and doesn't interpret the FTC's wordings very carefully, it inaccurately sounds like Microsoft had reneged on its commitments to the European Commission:

  "12. Microsoft’s past conduct provides a preview of the combined firm’s likely plans if it consummates the Proposed Acquisition, despite any assurances the company may offer regarding its plans. In March 2021, Microsoft acquired ZeniMax Media Inc. ('ZeniMax'), the parent company of the well-known game developer and publisher Bethesda Softworks LLC ('Bethesda'). Microsoft assured the European Commission ('EC') during its antitrust review of the ZeniMax purchase that Microsoft would not have the incentive to withhold ZeniMax titles from rival consoles. But, shortly after the EC cleared the transaction, Microsoft made public its decision to make several of the newly acquired ZeniMax titles, including Starfield, Redfall, and Elder Scrolls VI, Microsoft exclusives."

  All that the FTC actually says is that Microsoft denied an economic incentive to make titles exclusive. The FTC does not say--but it misleads people into concluding--that Microsoft didn't honor its commitments.

  As I already explained yesterday--but what is even more important now in light of the actual complaint--Microsoft has published a document (PDF) that shows the only actual promise was not to turn then-existing titles into exclusives--and that promise was kept as I had already shown in another post based on a table I found in a UK filing. Microsoft had in fact told the EC that exclusives could happen in the future, which would then be determined based on a variety of factors.

  A couple of exclusives merely prove the rule that generally cross-platform availability makes economic sense.

  If the FTC is concerned about Call of Duty, then the solution is to make sure that future Call of Duty titles will also be made available on the PlayStation. If the FTC is concerned about future titles that are not "AAA games" at this point, it has no case today. The FTC should also ask itself whether Sony's strategy centered around exclusive content actually contributed to those decisions on Bethesda titles that had not even been released at the time of that acquisition.

• The FTC has deposed Microsoft and Activision Blizzard executives, and it had been preparing this complaint for months. While there are some redacted passages, their context does not suggest in the slightest that the FTC found any "smoking gun" that seriously contradicts the arguments made in favor of the merger.

• The FTC can obviously focus on its own theories and allegations in its complaint and leave it to Microsoft to respond, but the complaint would definitely be more convincing if the FTC hadn't failed to recognize and address Sony's exclusive--and very acquisitive--content strategy. When a circumstance is so relevant to the case, you would normally expect the complaint to address it somehow. As I mentioned further above, it's possible that even those few Bethesda titles that were released post-acquisition as Microsoft platform exclusives would have been made available on all platforms if Sony didn't emphasize exclusives as aggressively as it does (except when it keeps a low profile for tactical reasons). I also mentioned this--and showed a tweet by famous (and now Sony-exclusive) game developer Hideo Kojima--in another recent post.

• Where the FTC definitely would have lost me (if it hadn't already) was paragraph 121 (alleged absence of countervailing factors):

  "Respondents cannot demonstrate that the Proposed Acquisition would likely generate verifiable, cognizable, merger-specific efficiencies that would reverse the likely competitive harm from the Proposed Acquisition."

  As an app developer who has been impacted by the mobile app store tyranny, I'm extremely disappointed to see the FTC ignore (for litigation purposes) the procompetitive dimension of the deal with a view to mobile app stores. In October this blog was first to point to what Microsoft said in a filing with the UK Competition & Markets Authority about "[s]hifting consumers away from the Google Play Store and App Store on mobile devices." After I wrote about it, many dozens of media around the globe reported on it as well.

  Later, even John Gruber--the "King of Apple Bloggers"--said in a Twitter debate with Epic Games CEO Tim Sweeney that "[a] Microsoft [app store on iOS] would be great" (I showed that tweet in a post on the Brazilian decision clearing the transaction).

  A few days ago, Microsoft published a five-page write-up (PDF) by Yale professor Fiona M. Scott Morton (who disclosed in the first footnote that she is "serving as an economic expert on behalf of Microsoft in connection with their proposed acquisition of Activision Blizzard") on principles to apply to platform mergers, with a particular focus on Microsoft and Activision Blizzard King. On page 4, she explains how Microsoft's purchase of Activision Blizzard King is key in order to compete with the incumbent mobile app stores. Of course, the first step is to force Apple to allow rival app stores, and for Google to allow them to effectively compete. That's what I also explained in my reaction to the American Economic Liberties Project's misguided press release that urged the FTC to block the deal. In Europe, that will happen because of the Digital Markets Act (DMA); and in the U.S. it hopefully will because of the Open App Markets Act (OAMA). The professor explains in her paper that "in an ideal world the DMA would just smoothly lead to the entry of app stores, [but] the real world is likely to be bumpier." And that's where Microsoft can make a difference, but it needs mobile games like Candy Crush to "help break the mobile app distribution bottleneck."

  At the beginning of her paper, the professor declares herself "a contributor to the modern antitrust movement that aims to take on market power in all sectors of the economy, including digital platforms." In other words, she's not an antitrust minimalist or traditionalist. But as she explains, "big" doesn't mean "bad." The latter requires a theory of harm.

And a credible theory of harm is what the FTC lacks here. As I wrote yesterday, the FTC is suing for the sake of suing, and maybe hoping that its predictable defeat will better enable it to advocate new legislation.

But before we get there, the case is going to be adjudicated by Administrative Law Judge (ALJ) D. Michael Chappell (the FTC's only ALJ at the moment). In a couple of weeks he--and the rest of us--will see Microsoft's response to that fundamentally flawed complaint.

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