Shulou(Shulou.com)11/24 Report--

Last Thursday, Microsoft had some bad news. Their ambitious strategy of horizontal game platform and content, the $68.7 billion acquisition of Activision Blizzard, was mercilessly rejected by the US government.

The Federal Trade Commission (FTC), the US antitrust regulator, decided to file an antitrust lawsuit against Microsoft's acquisition of Activision Blizzard by 3:1, asking an administrative court judge to veto the deal.

This decision will not surprise Microsoft, because they already know the result. Last month, the US media revealed that FTC had made the relevant decision. Microsoft has been communicating with FTC for the past few months, trying to make more concessions and promises, but the two sides have never reached an agreement.

It is worth mentioning that in the FTC committee vote, the only dissenting vote was Republican commissioner Christine Wilson. Although all five members of the FTC are nominated by the President of the United States, they take office after a vote in the Senate for a term of seven years. But the president can only nominate three members of his own party.

In January, Microsoft announced that it would buy game giant Activision Blizzard for $68.7 billion in cash. This is the largest M & An in the global gaming industry and the largest all-cash acquisition in history. But that's not a big deal for tech giant Microsoft, which had $168.1 billion in revenue and $69.9 billion in operating profit last year.

Since Nadella became Microsoft's CEO, he has been making a lot of acquisitions to expand his business. Over the past seven years, Microsoft has invested more than $70 billion and acquired more than 80 companies. Games are his key investment area, acquiring more than 10 game studios, including Zenimax last year and Mojang Studios before that. It is worth mentioning that games are one of the few products that Microsoft has achieved success in the consumer market.

After the completion of the acquisition of Activision Blizzard, Microsoft is on a par with Sony in game consoles and game content. Console, content and cloud are the three cornerstones of Microsoft's game business. Game Pass, a cloud game business, currently has more than 25 million users. With Activision Blizzard, Microsoft's market share in the global gaming business will rise from 6.5% to 10.7%.

After completing the acquisition, Activision Blizzard CEO Bobby Kotick will report to Microsoft game business CEO Spencer (Phil Spencer). Xbox Game Pass gaming services will also include popular works such as call of Duty, World of Warcraft and Candy Legend. Microsoft will also become the top three in the global gaming industry along with Sony and Tencent.

At the time, Microsoft expected the deal to be completed by June 2023, with a set termination fee of $3 billion. This suggests that Microsoft believes the deal will be approved by regulators in the United States and Europe. Because Microsoft still ranks third in the global gaming industry after acquiring Activision Blizzard, and their main competitor is Sony, not American companies.

FTC doesn't trust Microsoft, however, now US regulators have poured cold water on Microsoft's game strategy ambitions. FTC and the US Department of Justice are the two major antitrust regulators in the United States, and their responsibilities are slightly different, but they also overlap. The U.S. Department of Justice reports directly to the White House, while the FTC is nominated by the president but remains independent. FTC has no law enforcement power and must reject specific M & A transactions through litigation.

Why did FTC veto Microsoft's acquisition? They said in the lawsuit that if Microsoft controls Activision content, they will have the ability and more incentive to retain or weaken Activision content, significantly weakening market competition, including product quality, price and innovation. Weakening competition may cause significant harm to consumers in many markets at critical moments in the industry.

To put it simply, FTC is worried that after Microsoft buys Activision Blizzard, it will turn many popular games such as call of Duty and World of Warcraft into competitive chips for its own Xbox platform, raise prices for players on other platforms, or allow its own Xbox hosting platform to produce exclusive content in the future, thus limiting the choice of global gamers.

Holly Vedova, head of FTC's Market Competition Bureau, said Microsoft has shown that it is capable and may choose not to share content with competitors. FTC plans to prevent Microsoft from taking control of a leading independent game studio and from using it to hurt competition in many dynamic and fast-growing game markets.

That's what mainframe makers like Sony and Nintendo are worried about. Sony raised its objection publicly after Microsoft announced its acquisition of Activision. They believe that if Microsoft takes ownership of the call of Duty game, or if it restricts Activision games to other platforms in the future, it could hinder competition in the global gaming industry. Sony is the main voice in the industry against Microsoft's acquisition of Activision.

In an effort to allay concerns in the gaming industry and regulators and obtain antitrust approval, Microsoft promised several times this year that it would continue to offer popular games such as call of Duty on other platforms after the deal was completed. Microsoft has proposed to game platforms to sign "call of Duty" licensing agreements for the next decade, but Sony has not yet accepted the contract, and Nintendo and Valve have accepted similar contracts. In addition, Microsoft also announced plans to launch call of Duty on the Nintendo platform in the future.

The relationship between Microsoft and Sony, the two game console giants, has become increasingly strained on the issue of Microsoft's acquisition of Activision. Over the past few months, Microsoft has not only publicly refuted antitrust concerns from British regulators, saying they were actually misled by Sony's complaints, but also accused Sony of paying game developers to leave the Xbox platform.

Despite Microsoft's promises to win regulatory approval, FTC is not buying it. They said in the lawsuit that Microsoft had used the acquisition of game studios to suppress competition in other game console platforms, including the $7.5 billion acquisition of game developer Zenimax in 2021.

One of the grounds put forward by FTC is that Microsoft promised European Commission antitrust officials that they would not stop issuing and selling ZeniMax games on platforms outside Xbox, but after the EU approved the deal, Microsoft announced that Elder Scrolls VI, Redfall and Starfield games would be exclusive to Xbox.

But interestingly, when questioned by the media, the EU antitrust agency said that Microsoft did not make an appeal promise to them and did not promise not to launch an exclusive game in Xbox, so it was not misleading regulators, and then it did not break the promise. The EU's statement could embarrass FTC with evidence in the lawsuit.

Microsoft president announces response to FTC Microsoft has decided to respond to the lawsuit. Although the acquisition of Activision was blocked by a FTC lawsuit, neither Microsoft nor Activision plans to give up. Activision Blizzard CEO Cortek also said he believes Microsoft can win the lawsuit and eventually complete the acquisition. He stressed that FTC's allegations against Microsoft were not consistent with the facts.

"We still believe this deal will expand competition and create more opportunities for game developers and players," Brad Smith, Microsoft's president, responded after FTC announced the lawsuit. "We have been committed to competition concerns since day one, including more concessions to FTC earlier this week. While we believe in a peaceful solution, we are also confident of winning the lawsuit."

According to FTC's process of vetoing the deal, they first filed a lawsuit with the administrative court. Subsequently, the Administrative Court will hold a hearing and make a preliminary decision on the case. Both parties have the right to appeal to the federal court, and FTC can apply to the court for an injunction; if Microsoft loses, they have the right to appeal to the Federal Circuit Court, or even to the Supreme Court of the United States.

In addition, Microsoft's acquisition of Activision is subject to approval by market regulators such as the European Union and the UK. After the US antitrust regulator explicitly vetoed the deal, the position of the EU and the British government will also become the focus of attention from all walks of life. British regulator CMA has also made it clear that it is worried that Microsoft's acquisition of Activision will affect competition in the market for game consoles, game subscriptions and cloud services.

Generally speaking, companies often abandon acquisitions after being sued by FTC and are reluctant to engage in years-long lawsuits with regulators. Cases in this area abound. AT&T, the second-largest carrier in the United States, abandoned its $39 billion acquisition of fourth-largest operator T-Mobile in 2011 due to objections and lawsuits from FTC, Nvidia abandoned its $40 billion acquisition of ARM in February, and Meta abandoned plans to buy fitness service company Within in August.

However, giant companies sometimes choose to respond to antitrust regulators in the end and win in the end. AT&T announced a $85.4 billion acquisition of media giant time Warner in 2016, but the Justice Department filed an antitrust lawsuit the following year and plans to block the sky-high merger. After nearly three years of litigation and appeal, the Federal Court of Appeal for the District of Columbia ruled in favour of AT&T in 2019, and the U.S. Department of Justice finally chose to abandon it.

This is not the first time Microsoft has faced an antitrust lawsuit. The most landmark antitrust lawsuit in the US technology industry is the US government's lawsuit against Microsoft. Because Microsoft bundled IE browser into the Windows operating system, which violated the settlement agreement reached with FTC in 1992, the US Department of Justice together with 19 states filed an antitrust lawsuit against Microsoft in 1998.

In 2000, a federal district judge convicted Microsoft of antitrust charges and ordered Microsoft to be split into two separate companies, browsers and operating systems. If there is a spin-off, this is the largest antitrust spin-off and restructuring since the US government forcibly split AT&T in 1984. Facing extinction, Microsoft subsequently filed an appeal in a federal appeals court and won the appeal the following year.

In the end, the US Department of Justice and Microsoft announced a settlement, avoiding the outcome of a showdown in the Supreme Court. Microsoft agreed to share API with third-party companies and agreed to give a regulatory team unrestricted access to source code and Microsoft systems over the next five years. Although Microsoft appears to have won the legal battle, Microsoft co-founder Gates also resigned as CEO because of the lawsuit and abandoned his previous aggressive expansion strategy.

Lena Khan, chairman of the FTC, is an antitrust hawk. Another focus of the antitrust hawk is the increasingly tough antitrust stance of the US government. In the past few years, the Justice Department and FTC of the Trump administration and the Biden administration have successively launched several-year antitrust investigations against Google, Meta, Amazon and Apple, and have filed antitrust lawsuits against Google and Meta, explicitly demanding that Meta's Instagram business be spun off.

Although the antitrust intentions of the two parties are different, both the Trump administration and the Biden administration want to curb the growing political and economic influence of the tech giants. As a result, the Biden administration has continued the Trump administration's previous antitrust investigations and stepped up regulatory approvals.

Since Biden took office, he has appointed three antitrust hawkish scholars and lawyers to take charge of the three major antitrust executive positions in the United States: Lina Khan, a 32-year-old scholar from Columbia University, serves as chairman of FTC. Her colleague at Columbia, Tim Wu, has joined the National Economic Council as a special assistant to the president on science, technology and market competition policy. Jonanthan Kanter, an antitrust lawyer who championed the crackdown on Google, became the head of the antitrust department of the Justice Department.

It is worth mentioning that Lena Khan shot to fame by calling for antitrust and curbing technology giants. In 2017, Lena Khan, still a student at Yale University, published a paper entitled Amazon's Anti-monopoly Theory (Amazon's Antitrust Paradox), taking the e-commerce giant Amazon as an example, calling for a reform of the US antitrust legal system. By analyzing Amazon's business and competition model, Lena Khan points out that the monopoly measure of the Chicago School is no longer applicable to today's Internet platform era.

As expected, Lena Khan began to implement her regulatory philosophy as soon as she took office as FTC. In August last year, FTC resubmitted its antitrust complaint against Facebook, once again asking the court to order the split of WhatsApp and Instagram. In January, a federal district judge for the District of Columbia rejected Facebook's claim and decided to press ahead with FTC's lawsuit.

Lena Khan's FTC seems to be taking an antitrust stance to the end, preventing giants from expanding their business through mergers and acquisitions. In December, FTC filed an antitrust lawsuit against Nvidia, demanding that it reject Nvidia's $40 billion acquisition of Arm. After facing regulatory resistance, Nvidia finally had no choice but to abandon the deal. In addition, FTC successfully blocked Lockheed Martin's acquisition of Aerojet Rocketdyne. Ironically, Microsoft had publicly opposed Nvidia's acquisition of Arm, fearing that it would give Nvidia the lead on mobile platform chips.

And the Justice Department, led by Cantor, successfully blocked a major merger in the publishing industry last month: Penguin Penguin Random House's $2.1 billion merger of Simon & Schuster. On the issue of preventing mergers and acquisitions of corporate giants, Cantor and Lena Khan are highly consistent, saying that the two institutions will step up antitrust lawsuits in the future.

Even if the lawsuit fails, the two antitrust agencies plan to appeal to the end. At present, the M & An antitrust focus cases they appeal involve a number of industries: Illumina's acquisition of Grail in biotechnology, UnitedHealth's acquisition of Change Healthcare in healthcare, US Sugar's acquisition of Imperial Sugar in sugar, and Booz Allen's acquisition of EverWatch in information consulting.

The two even said, "the current high success rate of antitrust lawsuits by the federal government shows that we have not sued enough. We will continue to file more (antitrust) lawsuits."

Welcome to subscribe "Shulou Technology Information " to get latest news, interesting things and hot topics in the IT industry, and controls the hottest and latest Internet news, technology news and IT industry trends.