Wednesday, December 7, 2022

Nintendo's 10-year Call of Duty deal and NLRB charges against Apple pave the way for FTC approval of the acquisition of Activision Blizzard ahead of Microsoft president's meeting series with commissioners (reportedly today)

Today could be the most important day in the U.S. federal government's review of Microsoft's $69B acquisition of Activision Blizzard King (NASDAQ:ATVI). The New York Post, which reported on Sunday (as I analyzed in a blog post) that there may not be a majority at the United States Federal Trade Commission (FTC) for bringing litigation in an attempt to block the transaction, now claims to have the next scoop in this context: according to an article that appeared late Tuesday afternoon, "Microsoft President Brad Smith is planning to meet with the Federal Trade Commission’s three Democratic members on Wednesday."

The NY Post goes on to say that the executive "and a small group of his attorneys are slated to meet individually with FTC Chair Lina Khan — who is said to be skeptical of the tie-up and who this summer pledged to scrutinize the deal over its impact on workers — as well as Democratic commissioners Rebecca Slaughter and Alvaro Bedoya, according to sources close to the situation." Furthermore, "[t]he FTC’s commissioners are slated for a closed-door meeting on Thursday to discuss the merger and there’s an outside chance they could vote on it, sources said." Otherwise they could also vote later this month, but the NY Post believes things have recently accelerated and the decision won't take until January. The parties declined to comment.

From my perspective, the facts are pretty clear and I can't imagine there is any reason the FTC would have to wait until January. That's why I also don't believe FTC chair Lina Khan's pregnancy (she is expecting to give birth in January) should be considered a factor, and I can see why the FTC rejected any allusions to that.

The NY Post mentions what I, too, discussed yesterday: Mr. Smith's Wall Street Journal op-ed as well as Communications Workers of America (CWA) president Chris Shelton's The Hill contribution, both providing different reasons for approving the deal.

Two pieces of news that broke after those opinion pieces were published suggest to me that clearance is more likely now than before:

  • As VentureBeat and other media report, "Microsoft has signed an agreement to take Activision Blizzard’s Call of Duty franchise to Nintendo, [..] pending the closing of its acquisition of the Call of Duty maker." And Microsoft reportedly also made a ten-year commitment to keep Call of Duty's PC version on Steam.

    So, Nintendo has accepted an offer (with respect to the Switch and its upcoming successor) that Sony has so far refused with respect to the PlayStation, obviously just because what Sony really wants is to delay and potentially derail the transaction as it would rather strike exclusive deals with an independent Activision Blizzard. It diminishes Sony's credibility that Nintendo has opted for a constructive solution.

    Another significant implication is that Sony claims Nintendo makes more of a family games platform and isn't really in the same market (for hardcore gamers) as the PlayStation and Microsoft's Xbox. Sony is the undisputed market leader one way or the other, but in one scenario, the Xbox is #3, and in the other (if one ignored Nintendo) it would be #2 and the market would be a two-horse race. In a recent submission to the UK Competition & Markets Authority (CMA), Microsoft gave examples of Nintendo games with a "mature" rating. Now, the fact that Call of Duty will be available on Nintendo's consoles is another example of Nintendo indeed competing for hardcore gamers who savor the action shooter genre. The Microsoft-Nintendo agreement should also bear significant weight with the UK CMA, which has been misled by Sony for too long.

    Microsoft previously said it wanted to make more games (including Call of Duty) available to more gamers, and the agreement with Nintendo is further evidence.

  • FTC chair Lina Khan places some emphasis on labor implications of mergers, and in principle it is a laudable goal to consider not only consumers and competitors, but also an industry's employees, in a competition context. While game testers at a game studio Microsoft acquired a few years ago--Bethesda--are now free to unionize as they wish (and Activision Blizzard King employees would get the same benefit post-merger), other large tech companies than Microsoft notoriously push back on unionization in partly rather questionable ways.

    It probably won't go unnoticed by the FTC that a sister agency tasked with enforcing U.S. labor laws, the National Labor Relations Board (NLRB), has just held Apple in violation of those laws by interrogating workers and putting pressure on them in mandatory meetings:

    The CWA's support for Microsoft's acquisition of Activision Blizzard King contrasts nicely with Apple's conduct, and shows that workers' right to unionize--which is guaranteed under the CWA's agreement with Microsoft--is not to be taken for granted.

Now let's see whether those meetings between Microsoft's president and the three Democratic commissioners (the sole Republican at the moment is in favor of clearance anyway, and rightly so if you ask me) will yield a breakthrough. The fact that this effort is made is another indication that the FTC's hesitance to clear the acquisition has made an impact. But what is even more meaningful is that agreements such as between Microsoft and the CWA labor union as well as between Microsoft and Nintendo have materialized. Sony has a standing offer, and at some point competition enforcers may just tell the PlayStation maker that if it doesn't take the deal, it can't complain if the transaction is cleared anyway. Now, Microsoft would want to remain on the PlayStation in its own interest; removing CoD from that platform would not make sense (as a U.S. tech policy think tank already explained in October). That's why Sony doesn't want it--which in turn proves that there is no vertical foreclosure issue here.