The Federal Trade Commission had sued Microsoft to enjoin its acquisition of Activision Blizzard Inc., owner of the enormously popular Call of Duty video game franchise. The government argued the merger would foreclose rivals and diminish competition in highperformance gaming consoles, multigame content library subscription services, and cloud gaming US markets.
In the console market, the FTC argued that Microsoft would make Call of Duty exclusive to its Xbox platform or otherwise disadvantage competitors such as Sony Group Corp.'s PlayStation. In the other markets, the FTC asserted foreclosure and monopoly entrenchment.
A district court denied the FTC's motion for a preliminary injunction, and the US Court of Appeals for the Ninth Circuit affirmed.
Business Model Value
The appellate court's analysis highlights the value of business models that rely on external sales and post-merger plans in deal documentation.
Evidence demonstrating that cross-platform availability of Call of Duty was "critical" to the game's financial success supported a disincentive to foreclose, the court said. It indicated that PlayStation users accounted for a significant share of Call of Duty's revenue, with Activision's CEO testifying that revenues from Sony were approximately double those from Xbox.
Where external sales realistically are projected to constitute a substantial proportion of a party's revenues, this fact should be reflected clearly in deal assessment materials and future projections.
Theories vs. Facts
Facts must support theoretical models. The Ninth Circuit credited the lower court's finding that the FTC's choice of an "Xbox conversion rate" was an assumed number that lacked supporting evidence. The conversion rate is one at which PlayStation users would purchase an Xbox console to play Call of Duty if it weren't available on PlayStation and thus make up for lost PlayStation Call of Duty revenue.
Because the FTC model predicted net losses (a foreclosure disincentive) to Microsoft from making Call of Duty exclusive if the conversion rate were only 2.5% lower than the FTC's assumed 20% rate, the lower court held that the conversion rate was unsupported and speculative.
The Ninth Circuit agreed, emphasizing the need for facts over theoretical or conclusory assertions of competitive harm. This shows why counsel should attack unsupported assumptions.
Reputational Harm
While antitrust agencies historically discount reputational harm in assessing foreclosure incentives, the Ninth Circuit credited it as a significant factor.
The court recognized that removing Call of Duty from PlayStation would seriously harm Microsoft's reputation among millions of gamers.
This approach aligns with other recent federal court merger decisions and supports the argument that reputational harm can serve as a meaningful disincentive to foreclosure. This underscores why parties should develop evidence of reputational risks in advocacy.
Precedent and Evidence
The court found no historical precedent for withdrawing an established, multiplayer, cross-platform game from a major platform.
The FTC had argued that Microsoft's acquisition of ZeniMax Media Inc. and its subsequent exclusionary behavior over ZeniMax games developed post-closing demonstrated incentives to foreclose rivals from Call of Duty. But the Ninth Circuit held that Microsoft's acquisition of Minecraft was the better predictor of future behavior.
Although it was able to make Minecraft exclusive post-acquisition, Microsoft continued supplying the immensely popular game across competing platforms. Antitrust counsel should distinguish in detail prior acquisitions that agencies cite as predictive of future foreclosure.
The Ninth Circuit also placed significant weight on internal evidence, including consistent internal documentation and deal valuation models that didn't rely on increased Xbox console sales post-merger.
The production of such evidence in discovery, including 30 depositions and nearly one million documents, corroborated Microsoft's public commitments and persuaded the panel that there was no incentive to foreclose Call of Duty from PlayStation.
Where a procompetitive business case for the deal exists, internal documents and valuation models reflecting that will aid the agency decision.
Exclusivity and Monopoly
Monopoly entrenchment is a concept with its own entry in the 2023 merger guidelines and the opinion provides needed guidance in the vertical merger context. The court held that exclusivity alone doesn't establish a presumption of illegality for a vertical acquisition, and that agencies must quantify entrenchment effects.
Regarding the subscription services market, the court accepted that Microsoft would likely make Activision content exclusive to its Game Pass service. Activision, however, historically had refused to license its content to any subscription service due to cannibalization concerns.
The FTC failed to present sufficient evidence that Activision content would become available to rival services absent the merger, the Ninth Circuit held, so merger wouldn't foreclose "a share of the market otherwise open to competitors." This demonstrated that pre-merger financial incentives can rebut the agencies' but-for world.
The Ninth Circuit disagreed with the FTC's claim that in the emerging cloud gaming market the merger "would allow Microsoft to seriously disadvantage its rivals," holding that "conclusory assertions" failed to meet the agency's burden of proof. Specifically, the FTC didn't quantitatively analyze how Microsoft's exclusive access to Activision content would affect competition—demonstrating that counsel should attack failure of proof.
Vertical Antitrust Advocacy
The Ninth Circuit decision underscores the importance of robust, fact-based advocacy in vertical mergers. Parties should:
- Carefully document business strategies and realistic post-merger plans involving third-party sales
- Advocate about reputational harm
- Distinguish prior transactions that don't mirror current deal conditions
- Reflect legitimate procompetitive aspects of a deal in internal and M&A documents and valuation models
- Test the agency's theoretical economic models for assumptions unsupported by realworld facts.
By following guidance in the Ninth Circuit's Microsoft-Activision opinion, corporate and legal teams can enhance their prospects for successful clearance in vertical transactions subject to antitrust scrutiny.
Originally published by Bloomberg Law
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
