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Ninth Circuit:
Judge Properly Denied FTC’s Bid to Bar Video Game Merger
Opinion Says Agency Failed to Establish Likelihood of Success on Merits of Claims That Microsoft’s Acquisition of ‘Call of Duty’ Developer Would Substantially Lessen Competition
By Kimber Cooley, associate editor
The Ninth U.S. Circuit Court of Appeals yesterday held that the Federal Trade Commission’s motion for a preliminary injunction, seeking to block Microsoft Corporation’s acquisition of gaming developer Activision Blizzard Inc., was properly denied because the agency had failed to establish that it was likely to succeed on the merits of its claim that the move would substantially interfere with competition in the relevant video gaming markets.
After Microsoft announced plans to acquire Activision, the developer of the wildly popular “Call of Duty” gaming series, the FTC filed an administrative complaint against the merger. The agency also filed a request for a preliminary injunction in federal court, under §13(b) of the Federal Trade Commission Act, on June 12, 2023, approximately one month before the July 18 date scheduled for deal closure.
On July 10, 2023, after an expedited hearing, District Court Judge Jacqueline Scott Corley of the Northern District of California denied the agency’s request. A few days later, the Ninth Circuit blocked an emergency motion by the FTC for an injunction pending appeal.
In October 2023, the $69 billion acquisition was completed, after Microsoft took actions to assuage concerns expressed by the United Kingdom’s Competition and Markets Authority regarding the merger.
Administrative proceedings before the FTC concerning the acquisition were placed on hold in 2023, pending the final decision by the Ninth Circuit on this appeal.
Yesterday’s opinion was authored by Circuit Judge Daniel P. Collins and joined in by Circuit Judges Danielle J. Forrest and Jennifer Sung.
Industry-Specific Issues
Collins explained some of the industry-specific issues at play, writing:
“Microsoft…manufactures physical video game consoles (e.g., the “Xbox” console) that can play a variety of games that are loaded into them, and…also develops and publishes some of its own video games….Other companies, such as Activision…, develop and publish games (such as Call of Duty) but do not manufacture the devices on which those games would be played.”
Games can be played on consoles, through the use of physical discs or digitally through online subscription services offered by Microsoft and others. Players can also obtain access to some games through cloud-based services, such that the program is run on remote services and streamed to the gamer on a console, phone, or computer.
Developers earn revenue either by a royalty split with the platform owner or by selling content within the games.
“Call of Duty” is one of the most popular video game franchises of all time and is responsible for a sizeable proportion of Activision’s $7.5 billion reported total net revenue in 2022. Before the merger, the game was available on both Xbox and Sony PlayStation consoles but was not available on any subscription or cloud-based service.
The game also offers multiplayer options where gamers on different platforms can play together.
Lessen Competition
The FTC asserts that the merger is likely to violate §7 of the Clayton Act, found at 15 U.S.C. § 18, which prohibits acquisitions “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”
Its main theory is that Microsoft would be expected to make the game exclusive to Xbox, causing gamers to stop using Sony PlayStation devices, substantially lessening competition in the console market.
Collins noted that “[i]n addition to its administrative authorities, the FTC is also authorized, under §13(b) of the FTC Act, to file suit in a federal district court seeking to preliminarily enjoin any actual or imminent violation.” Under §13(b), courts look to the likelihood that the FTC will ultimately succeed on the merits as well as considering the balance of equities.
Corley found that both factors weighed against preliminary relief. The Ninth Circuit affirmed based solely on the likelihood-of-success prong.
Likelihood of Success
Collins pointed out that Corley agreed with the FTC that the “primary market” is the “high-performance console market” in the U.S., and remarked:
“The district court found that Microsoft would be highly unlikely to withdraw Call of Duty from PlayStation, given that ‘Call of Duty’s cross-platform play is critical to its financial success.’…Call of Duty has a very popular multiplayer component, which allows gamers to play with others across devices. Removing Call of Duty from PlayStation would destroy the communities of players that have built up around the multiplayer aspect, particularly given the undisputed evidence that there are significantly more Call of Duty players on PlayStation than on Xbox….[I]n addition to losing very substantial revenue from such PlayStation gamers, Microsoft would be expected to experience serious ‘reputational harm’ if it pulled Call of Duty from PlayStation and thereby blocked millions of PlayStation gamers’ access to the game.”
Noting that the FTC has not identified any instance where a multi-platform game with cross-play features has been made exclusive to one company, the jurist declared:
“[W]e conclude that the district court did not abuse its discretion in holding that the FTC had not made the requisite showing of a likelihood of success on its claim that Microsoft might make Call of Duty exclusive to Xbox after the merger.”
Subscription, Cloud Services
Turning to the U.S.-based subscription and cloud services markets, he explained:
“The [district] court…started from the premise that Microsoft would have both the ability and the incentive to exercise exclusivity rights with respect to Call of Duty and other Activision Blizzard content in the subscription market. The district court nonetheless concluded that, because Activision Blizzard had long opposed putting its content on subscription services, the merger’s effect of making such content available for the first time in the subscription market, even if exclusive to Microsoft, would not substantially lessen competition.”
Under these “unusual circumstances,” Collins opined that “making Activision Blizzard content exclusive to Microsoft’s subscription services would not foreclose a share of the subscription market ‘otherwise open to competitors.’ ”
Saying that the agency was similarly unlikely to succeed in its claim relating to the cloud services market, Collins noted that the game has not been available to stream since 2020 and was unlikely to change course in the future because of limited economic incentives to do so.
He concluded:
“Given the FTC’s failure to make an adequate showing as to its likelihood of success on the merits as to any of its theories, the district court properly denied the FTC’s motion for a preliminary injunction on that basis.”
The case is FTC v. Microsoft Corporation, 23-15992.
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