Microsoft is gearing up for a fight with the FTC over the Activision deal

Microsoft corp

MSFT -1.73%

has signaled that it plans to challenge the Federal Trade Commission’s lawsuit to block its $75 billion Activision ATVI deal -0.38%

Blizzard Inc., and is expected to argue that it is an outsider in video game development.

The personal computing company has been publicizing its position for months, stating that the acquisition would not threaten competition in the industry as Microsoft lags behind its peers in video game consoles and has a limited presence in mobile game development. The company has also said that it expects the industry to become more competitive in the future with the rise of cloud gaming.

Legal experts say Microsoft is likely to base its case on these talking points, as well as the fact that it is seeking a so-called vertical merger, meaning it is buying a company in its supply chain as opposed to a direct competitor.

The deal “is fundamentally good for gamers, good for consumers, good for game developers and good for competition,” Brad Smith, Microsoft’s president and vice chairman, said at the company’s annual meeting on Tuesday. “We will have to take this case to a judge in court because this is a case in which I have great confidence.”

Microsoft has until Thursday to respond to the FTC’s lawsuit, which was filed Dec. 8 in the agency’s administrative court.

In its complaint, the FTC claimed the deal was illegal because it would give Microsoft the ability to control how consumers access Activision’s games outside of the company’s Redmond, Washington-based Xbox consoles and subscription services. The company could raise prices or discount Activision’s content for people who don’t use its hardware to access the developer’s games, or even cut off access to the games entirely, the FTC said.

“When you can control a major content source like Activision Blizzard, there are a lot of tools that you can leverage,” which could stifle competition, an agency official said earlier this month.

At the shareholders’ meeting, Mr. Smith contradicted the FTC’s concerns that Microsoft’s main competitor, PlayStation maker Sony Group corp

would be hurt by the deal, saying that Sony has too much of a head start in high-performance consoles to warrant protection.

Microsoft Gaming CEO Phil Spencer discusses growth in cloud gaming, gaming subscriptions and the proposed acquisition of Activision Blizzard.

He went on to argue that the FTC’s case hinged largely on concerns that Microsoft might one day make games of Activision’s Call of Duty – which was a hit with PlayStation users – exclusively for its Xbox system. Mr Smith said Sony now has about four times as many exclusive games on its consoles as Microsoft has on its slots.

Sony did not respond to a request for comment.

Microsoft said it made a last-minute offer to make Call of Duty games accessible to others through a legally binding consent decree, complementing an offer the company made months earlier to keep it accessible for at least 10 years keep.

A hearing in the FTC Administrative Court will be held in August if no agreement is reached by then. After the case is heard, legal experts say it could be months before a decision is made before the losing side can appeal with the full commission. If appealed, the commission re-examines the entire record and hears oral arguments before deciding to uphold or overturn the administrative judge’s order. If Microsoft loses at this point, the company can appeal the commission’s decision in a federal appeals court.

“This is by no means a slugfest for the FTC,” said Eric Talley, a professor at Columbia Law School. “Even though the odds are a bit slim, they show they’re willing to step on the hoops to swing the legal precedent a little bit more in their favor.”

Microsoft recently took a last-minute move to expand its offering to make Activision’s Call of Duty games accessible to others.


Photo:

Martin Meissner/Associated Press

Some analysts said Microsoft may want to drop the acquisition, which values ​​the company at $68.7 billion after accounting for Activision’s net cash position, to avoid an executive distraction and expensive regulatory concessions. Microsoft has said it is committed to addressing regulators’ concerns.

While the litigation continues, Microsoft could offer additional commitments to the FTC or implement them itself, said Benjamin Sirota, antitrust attorney at the law firm Kobre & Kim LLP in New York. But to be satisfied, the government would need to enforce those commitments, which “requires resources and circumstances often change,” he said. The agency could also consider how “commitments that solve a competition problem now might not work in the future,” he added.

According to David Hoppe, mergers and acquisitions, technology and media attorney at Gamma Law in San Francisco, the FTC faces hurdles in its case because of the transaction’s vertical merger status.

“In these cases, it’s difficult to prove consumer harm,” he said. “It’s not two competitors joining forces, in which case the harm to consumers is usually obvious.”

The FTC has made clear its intention to extend the scope of the damage beyond the likely impact of a merger on consumer prices, Mr Hoppe said. The agency could be concerned about actions that could indirectly put consumers at risk, he said, such as the combined company’s misuse of sensitive information about competitors. This information could give Microsoft a way to discourage newcomers in video game distribution from succeeding, which could result in fewer options for consumers, he said.

“It’s about the network effect,” Hoppe said.

Write to Sarah E. Needleman at [email protected]

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