Feds sue to block Microsoft’s $69B video game deal

The Federal Trade Commission on Thursday sued to block Microsoft’s purchase of the video game giant Activision Blizzard, maker of the hit games Call of Duty and Candy Crush, arguing the $69 billion deal would harm competition in the video game industry.

The lawsuit is the FTC’s biggest move yet under Chair Lina Khan to rein in the power of the world’s largest technology companies. It is also a major black mark for Microsoft, which has positioned itself as a white knight of sorts on antitrust issues in the tech sector after going through its own grueling regulatory antitrust battles around the world more than two decades ago.

The lawsuit, filed in the FTC’s in-house administrative court, comes a day after Microsoft executives and the company’s lawyers met with the agency’s three Democratic commissioners in a last ditch effort to defend the deal, according to a person familiar with the discussions who spoke on the condition of anonymity to discuss a sensitive matter. Now that the case is pending in the FTC's in-house court, an administrative judge will preside over a trial, followed by an appeal to the commissioners, who are now walled off from the staff attorneys working on the litigation.

The FTC voted, 3-1, to issue the complaint, with all three Democrats — Lina Khan, Alvaro Bedoya and Rebecca Kelly Slaughter — supporting the move, and Republican Christine S. Wilson voting no.

POLITICO previously reported that a lawsuit could come as early as December.

Central to the FTC’s concerns is whether acquiring Activision would give Microsoft an unfair boost in the video game market. Microsoft’s Xbox is No. 3 behind the industry-leading Sony Interactive Entertainment and its PlayStation console. Sony, however, has emerged as the deal’s primary opponent, telling the FTC and regulators in other countries that if Microsoft made hit games like Call of Duty exclusive to its platforms, Sony would be significantly disadvantaged.

On Thursday, the FTC said Microsoft has a history of buying game companies and making key titles exclusive. The agency pointed to the acquisition of ZeniMax, parent company of Bethesda Softworks, and the subsequent move to make several games, including"Starfield" and "Redfall," Microsoft exclusives "despite assurances it had given to European antitrust authorities that it had no incentive to withhold games from rival consoles."

Brad Smith, the president of Microsoft, said that the company has "been committed since Day One to addressing competition concerns, including by offering earlier this week proposed concessions to the FTC," adding that "While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court."

In a missive to employees, Activision Blizzard CEO Bobby Kotick sounded upbeat on Thursday, noting that while news of the suit "sounds alarming," he remains confident "this deal will close."

"The allegation that this deal is anti-competitive doesn't align with the facts, and we believe we’ll win this challenge," Kotick added.

Microsoft has pledged to continue making Call of Duty available on Sony’s PlayStation console, and recently made an offer to give Sony access to the game for the next 10 years, an overture reiterated in a Wall Street Journal op-ed on Monday by Microsoft President Brad Smith. Sony has not accepted the offer and has yet to comment publicly.

On Tuesday, Microsoft said it reached similar 10-year agreements with Nintendo and Valve, operator of video game distribution service Steam. Call of Duty is not currently available on Nintendo, but it is through Steam. The agreements are contingent on Microsoft closing the Activision deal.

Microsoft has repeatedly said that pulling Call of Duty from Sony’s market-leading PlayStation console would not make financial sense. The FTC’s concerns, however, extend beyond physical consoles, and include whether Microsoft would leverage the deal to dominate the nascent cloud gaming market and subscription gaming services. The company’s Xbox Game Pass is already the market-leading subscription service.

Concerns also extend beyond Call of Duty, with the agency asking during its investigation whether Microsoft could leverage future, unannounced titles to boost its gaming business, according to two people with knowledge of the review.

The FTC said that Microsoft would have both "the means and motive to harm competition" if it brought Activision's big games under its control. Microsoft could change pricing, make a game play differently or perhaps worse on rival consoles or keep content "from competitors entirely, resulting in harm to consumers."

The FTC is not the companies’ only hurdle. Both the EU and U.K. also have ongoing in-depth probes of the deal, with a preliminary U.K. decision due in late January and final decision due in late March. The EU also has a late March deadline to wrap up its probe. An FTC official, who requested anonymity as a condition of speaking with press, said the outcome of the European probes won’t necessarily impact the agency’s case.

“The fact that the commission voted out a complaint meant that they believe there's grounds to proceed at this point,” the official said. “There's nothing that welds U.S. regulators to move in lockstep with non-U.S. To the contrary, we have our own statutes.” The official also noted that the FTC’s case deals specifically with the U.S. geographic market and “harm that could occur to U.S. consumers.”

The FTC is currently neck deep in the gaming market, with a trial also starting Thursday in its lawsuit to block Meta Platforms takeover of Within, maker of Supernatural, a virtual reality fitness game. And the agency is now in the middle of prosecuting a sprawling antitrust case against Meta. The FTC and its backers in Congress have long worried the agency lacks the resources to go toe-to-toe with the largest tech companies — and now it’s just picked a fight with another one.

“These are very, very wealthy corporations. They hire armies of lawyers,” the FTC official said. “At the same time, I would say we are absolutely ready to litigate this case. The FTC has, I think, the world's finest antitrust fighting force, and they are standing ready to prosecute this.”

Brendan Bordelon contributed to this report.