Microsoft’s planned acquisition of Activision Blizzard is the largest-ever deal in the video game market by a mile. With a sale price of $68.7 billion, the deal is more than five times larger than Grand Theft Auto publisher Take-Two Interactive’s acquisition of Zynga in January, the next-largest game acquisition ever recorded.
The eye-popping price underlines the scale and scope of Microsoft’s ambitions for its gaming business: If the deal is approved, Microsoft would own — alongside its current major properties, such as Halo and Minecraft — Warcraft, Overwatch and Call of Duty, to name just a few. In turn, the deal has invited a rare level of scrutiny and attention from lawmakers and policy professionals now turning their sights on an industry that’s flown under the regulatory radar for the last several decades of its existence.
The Federal Trade Commission is now in charge of reviewing the deal. With a newly empowered chair in antitrust expert and Big Tech critic Lina Khan, and finally a Democratic majority thanks to the confirmation of commissioner Alvaro Bedoya, one big question stands out: Could the U.S. government block the deal, and on what grounds?
If regulators bar the acquisition, the fallout could deal a substantial blow to Microsoft’s Xbox ambitions. For the last several years, the company has pursued an aggressive expansion of its Game Pass subscription service, and now plans to roll out game streaming via the cloud to devices like set-top boxes, smart TVs and smartphones, using content libraries it acquired through major deals like the Activision one.
Activision Blizzard, which remains in perpetual crisis following a series of explosive lawsuits over sexual harassment and discrimination, would also lose its lucrative exit strategy, with CEO Bobby Kotick on the hook to find a new buyer and navigate an industry that wants him removed.
What the FTC might look for
Back in April, FTC was gearing up to “examine the deal with an eye to the combined companies’ access to consumer data, the game developer labour market and the deal’s impact on those workers who have accused Activision of discrimination and a hostile workplace,” The Information reported.
The review is also said to focus on the metaverse, and whether Microsoft owning such large multiplatform gaming properties such as Call of Duty and Minecraft, in addition to its software and hardware platforms like Xbox, HoloLens, Azure and Office, could harm competition in not-yet-developed markets.
Antitrust experts who spoke to Protocol believe the deal is more than likely to succeed, but not without some strings attached. “It is very unlikely” the agency will block the deal outright, antitrust expert Aurelien Portuese, who leads a competition policy group at the Information Technology and Innovation Foundation think tank, told Protocol.
Portuese cited a number of factors for his prediction, particularly the rest of the gaming market. The combined businesses of Xbox and Activision Blizzard would only give Microsoft the No. 3 position in the gaming industry by global revenue, after Sony and market leader Tencent. “The combination of Microsoft’s experience in software with Activision's creativity would seem to be a good fit in order to challenge bigger players,” he said. “I think it’s going to be very hard for the FTC to argue that there’s a fundamental dominant position that will not be challenged in the near future.”
Portuese also said competition from Asian gaming companies will also put pressure on the FTC to strive for behavioral or structural concessions to the Xbox business or Microsoft’s exclusive game strategy rather than killing the deal.
“Asian competition in the gaming industry,” particularly from Japan and, more recently, China, “is the historically strongest and most innovative and most technologically advanced competition. If we block some Western merger between two American or Western gaming companies, it may give a comparative advantage to larger Asian competitors,” Portuese said. “A blocked merger would be the best gift you can give to Sony or Tencent.”
Microsoft CEO Satya Nadella provided the same justification when speaking with the Financial Times in February. “Even post-this acquisition, we will be number three with sort of low teens [market] share, where even the highest player is also [in the] teens [for market] share," Nadella said. "It shows how fragmented content creation platforms are."
Potential compromises for Xbox
There are some hints as to what type of concessions the FTC might demand. Just weeks after announcing the acquisition, Microsoft said it had drafted its own app store principles in a corporate blog post titled, “Adapting ahead of regulation.”
The principles covered a wide range of issues from data security and privacy to competition and developer choice, including a pledge to "not use any non-public information or data from our app store to compete with developers’ apps.” The post also included rules on fairness for the ranking and placement of apps in Microsoft’s digital storefronts, as well as principles outlining Microsoft's positions on developer choice — letting app makers choose third-party payment systems and communicate directly with customers.
The rules did not, however, apply all across the board. The Xbox storefront was excluded from those related to payment systems, while Microsoft said it was "committed to closing the gap on the remaining principles [for Xbox] over time."
That's one potential FTC demand: ensuring Microsoft applies its new app store rules universally, across its PC storefront and on the Xbox, and sooner rather than later. But app stores are only one potential area of concern as the FTC reviews the deal. Another is exclusive games, a hallmark of the console gaming industry as console makers Microsoft, Sony and Nintendo try to make their respective ecosystems as attractive as possible.
Microsoft purchased Bethesda Softworks parent company ZeniMax Media for $8.1 billion in the fall of 2020. A year later, it said upcoming Bethesda titles such as role-playing game Starfield would not be published on Sony’s competing PlayStation platform. So when the Windows maker announced the Activision deal, players and industry watchers alike were concerned titles such as Call of Duty, the best-selling video game series in the U.S. almost every year for the last decade, might become Xbox exclusive too.
Microsoft got out ahead of the controversy with a statement that still left some wiggle room. “To be clear, Microsoft will continue to make Call of Duty and other popular Activision Blizzard titles available on PlayStation through the term of any existing agreement with Activision,” the company said. “And we have committed to Sony that we will also make them available on PlayStation beyond the existing agreement and into the future so that Sony fans can continue to enjoy the games they love.”
That wiggle room, and the fact that Microsoft would have no legal obligation to support its prime competitor, could give the FTC an opening. “The one potential path to go forward is to go forward with some commitments like, ‘We won’t make XYZ content exclusive.’ They’ve said that publicly, but it’s different to get that in writing,” said Sumit Sharma, a senior researcher at Consumer Reports who specializes in antitrust. “I think that will be an interesting aspect of this case: if the [FTC] accepts reasonable commitments or not.”
The review may also delve into areas that have little to no precedent in tech- or gaming-related antitrust enforcement, but still may take on a bigger role in Khan’s FTC. That includes data privacy, which is a concern considering the combined Xbox and Activision Blizzard have nearly 500 million consumers across the two companies’ console, mobile and PC platforms.
“How should we consider data in these big mergers?” Sharma said. ”If there’s a big merger where there’s lots of data to be pooled, how should we consider whether this would give them market power, and can that be exploited? These are definitely questions that are being asked.”
The same can be said for how the deal might affect small developers, like indie game makers that rely on the Xbox platform and its Game Pass subscription service for distribution. “Electronic Arts is very big,” Sharma said as an example. “They’re obviously in a pretty good bargaining position, because they have titles that everyone wants. But when it comes to smaller developers and publishers for whom these guys might be an important route to get to the customer, how are they affected?”
The labor question
Activision Blizzard’s ongoing workplace issues present another wrinkle for Microsoft. Though not strictly an antitrust concern, the FTC could take into account labor conditions for contract workers and other employees who have been speaking out about low pay, mistreatment and layoffs in an industry known for rampant worker exploitation.
A contingent of U.S. Congress members specifically called out those issues in a letter to the FTC in March asking the agency to “assess whether the ways in which these companies have failed to protect the rights and dignity of their workers are driven by monopsony power or amount to anticompetitive harms in our labor market, and if so, if the merger will exacerbate these problems.”
The letter was signed by Sens. Elizabeth Warren, Bernie Sanders, Cory Booker and Sheldon Whitehouse. It followed a similar letter from 15 public policy organizations that same month asking the FTC to perform a thorough investigation.
The senators cited Activision Blizzard’s ongoing sexual harassment and discrimination lawsuits being the instigator for the sale to Microsoft, as well as the company’s opposition to a union of quality assurance workers at subsidiary Raven Software and use of union-busting tactics to undermine other worker organizing efforts. (On Monday, Raven Software employees voted in a NLRB election to form a recognized union, the first of its kind in the industry; Microsoft said in March it would honor workers' right to choose and would honor any decision made.)
“The proposed acquisition appears to be a cynical and ‘opportunistic’ attempt to capitalize off the systemic issues coming to light at Activision Blizzard,” the letter reads. “This lack of accountability, despite shareholders, employees, and the public calling for Kotick to be held responsible for the culture he created, would be an unacceptable result of the proposed Microsoft acquisition.”
Workers themselves have begun speaking out about the deal and how it may affect their livelihoods and working conditions.
“With Microsoft's impending takeover of Activision Blizzard, workers face a lot of uncertainty,” Brice Arnold, a design researcher at Activision Blizzard, said during a listening forum with representatives of the FTC and DOJ earlier this month. “We believe that the impacts on workers need to be taken into account and if a deal is bad for workers, it should either be blocked or made to include enforceable commitments to respect workers' rights.”
Although experts think the deal will make it through, these questions and many more loom large over how many concessions Microsoft will make and just how long it may take to arrive at a compromise that pleases the FTC. For now, the company is preparing for a lengthy back-and-forth that could last well into next year, with a deal-closing target deadline of June 2023.
“It’s moving fast, at least fast enough for an acquisition of this size,” Microsoft President Brad Smith said of the deal’s timeline in an interview last week with Belgian business publication L’Echo. “We have received requests for information on this subject here in Brussels, but also in London and Washington. We answer questions, we give briefings and we provide the information requested.”
“One of our attorneys summed it up nicely by saying, ‘We’re coming to the end of the beginning and now we’re entering the beginning of the middle,’” Smith added. “It’s a long process and we’re still at the stage where we’re answering questions. For us, of course, the sooner it is done the better, but we will respect the process.”
“I think it’s going to be a detailed review, it will take a fair amount of time,” Sharma said. “Microsoft has learned from its past and has become much better at dealing with regulators and competition authorities both in Europe and the U.S.”