Monday, December 5, 2022

Split FTC may very well clear Microsoft's $69B purchase of Activision Blizzard now: New York Post article on commissioner Slaughter's stance passes plausibility test, appears to have substance

Rumors keep flying over the merger review process in the U.S. relating to Microsoft's $69B acquisition of Activision Blizzard King. Last week, Politico's Josh Sisco reported that the staff of the Federal Trade Commission (FTC) would likely issue a recommendation against the deal, and discussed when and where (in-house court first, or federal court right away) the FTC would sue. There was a lot of speculation in it, and the article made it clear that it was too early to tell.

I totally disagreed with only one part: the notion of a "black mark" on Microsoft's reputation as a Big Tech player who cooperates with regulators. Seeking approval of a merger is not comparable in the slightest to actual misconduct (be it monopoly abuse, as Microsoft knows from about 20 years ago, or cartelization). If I ask a government agency whether I'm allowed to do something, I'm not breaking a law until I do it regardless of a negative answer. And if I believe I have the right to do it and I seek judicial review of a no, I'm still not breaking any law and exercising a fundamental right that is essential for the system to function (and not to descend into arbitrariness). So, I think the "black mark" part was off base, and it surprised me from a reporter with considerable experience covering antitrust matters, but that doesn't mean that Politico's sources weren't right about the staff's inclination.

MLex--Mr. Sisco's previous employer--reported at around the same time that the FTC was not interested in whether Microsoft and Sony would reach an agreement. It is now widely known that Microsoft offered a ten-year deal for Call of Duty to be available on the PlayStation. And there were rumors of Microsoft and Sony having met about a week ago to negotiate.

Just before the weekend, Bloomberg then cited an unidentified source saying that Microsoft was "gearing up to contest" a blocking decision in court.

There was information in the Politico article on how the commissioners are inclined to vote. On Sunday, however, the New York Post claimed to have sources indicating a spit among the presently four commissioners. In order to sue, the FTC needs a majority; a split means the deal is approved, and the article speculates that FTC chair Lina Khan may want to avoid a situation like that as it could undermine her authority if one of her fellow Democrats declines to follow her.

Does the New York Post know more--and does it know something more important (as the commissioners vote while the staff merely recommends)--than Politico and possibly even MLex? It may seem counterintuitive, but in this case the New York Post may just have scooped on other media, even including specialized media.

To be honest, my initial reaction was not to attach too much importance to the NY Post story, but it changed when I read it and reflected on its content. Let me start with why I had some initial reservations before explaining why I overcame them and now believe there is a decent chance that the article correctly describes the situation:

  • It is fair to say that the Wall Street Journal and the New York Times are far more influential and less controversial than their neighbor NY Post.

  • The NY Post is not on the best terms with Democrats, which is a limiting factor when trying to find out about the Biden Administration's inclinations.

  • The NY Post doesn't have antitrust-specialized reporters. Josh Kosman, who wrote the article I just linked to, reports on business topics, but is not an expert on regulation.

  • It's been less than a month since two other NY Post reporters published an article on the same regulatory matter that didn't seem credible at all. They said that people inside Activision Blizzard were concerned about Microsoft not having offered remedies at that stage and that the deal could fall apart. First, why would Activision Blizzard insiders--almost all of whom are on the West Coast--talk to the NY Post and not the L.A. Times? Second, why would an acquirer who knows that there is no legally defensible theory of harm with which any regulator could block the deal offer remedies at an early stage of proceeding (as opposed to a little later when it's really about just getting the deal done without complications)? Third, it looked to me like someone on Wall Street was using the NY Post for an agenda (a shortseller trying to drive the stock price further down to cash in on that movement, or someone who placed a "long" bet on ATVI and wanted to up the pressure on Microsoft to offer concessions).

So when this new article appeared bullish on the deal, I wanted to be sure I wasn't being misled by a confirmation bias. My stance on the deal is clear, and I've been very forthright about not only my Microsoft and Blizzard connections (which do not change anything about my desire to provide correct analysis and maximize my prediction hit rate) but, above all, my interest as an app developer in Microsoft creating a cross-platform mobile app store that competes with Apple's App Store and the Google Play Store (provided that legislative measures or regulatory or judicial decisions enable third-party app stores to compete with the incumbents on a level playing field).

The NY Post article is not too good to be true. It has too much substance to be discounted--more specific and potentially relevant information than the previous NY Post article on the deal, but also more than what I've seen from others reporting on the FTC approval process--and this time around it is possible that the NY Post had access to a great source about things that happen between New York City and Washington DC.

The FTC is currently one commissioner short (four members instead of five). The Biden Administration has not been very efficient at running its nominations through Congress, and in this case, the next commissioner would have to be a Republican anyway. So there presently are three Democrats (Lina Khan, Rebecca Kelly Slaughter, Avaro Bedoya) and one Republican (Christine Wilson).

Mrs. Wilson is clearly not on the same page as Chair Khan, and she's made it clear in various contexts. She was also a vocal dissenter from the FTC's pursuit of the case against Qualcomm (and in the end the Ninth Circuit supported her opposition to that one). The NY Post says Mrs. Wilson "has signaled support of the deal," and there is no particular reason to doubt that. So all it takes is one of the Democrats to vote in favor of clearance.

The NY Post says "the identity of the dissenting Democrat couldn’t immediately be confirmed, DC sources following the situation pointed to [Mrs.] Slaughter."

Clearly, Mrs. Slaughter would have had reasons to resign from the FTC when President Biden appointed 33-year-old Lina Khan--based only on her academic work--not just as a commissioner (which would already have been a bold move) but as chair. At the time, Mrs. Slaughter was the Acting Chair. Frankly, many others in her place would have resigned (and become a partner at a Big Law firm), not because Mrs. Khan couldn't have been a great FTC chair further down the road, but because it would have made more sense to let her serve a first term as just another commissioner. The obvious Democratic choice for the top job would have been Mrs. Slaughter.

Mrs. Khan's appointment was criticized by Senator Mike Lee (R-Utah). I found it inconsistent that someone who wanted to serve on the Supreme Court without a judicial career warned against an FTC commissioner "learning on the job." But at the time it wasn't clear Mrs. Khan was going to become chair right away, and in the same post I also said that Sen. Lee's reference to Mrs. Khan "being less than four years out of law school" would be valid "[i]f the average number of years of professional experience of all FTC commissioners was brought down to four years, or even to eight years." I would compare this to the sitaution at Google, where long-time non-founder CEO Eric Schmidt quipped that "adult supervision" was no longer needed when he stepped down and founder Larry Page took over.

At the current FTC, it is Mrs. Slaughter who can help with "adult supervision" in the sense of preventing the agency from making mistakes for the relative lack of the (otherwise probably brilliant) chair's professional experience. She can play that role not only through persuasion (or, in this case, dissuasion), but if all else fails, she can cast the decisive vote.

To be clear, Mrs. Slaughter is not "the anti-Khan." There is every reason to believe that--despite having been passed over for the promotion--she is loyal and, above all, she appears principled. For example, in May I commented on a submission that Mrs. Khan and Mrs. Slaughter jointly made to the U.S. International Trade Commission in connection with standard-essential patent enforcement. There was a potential procedural issue because the two submitted that letter without following standard FTC practice of seeking internal approval (which they could have obtained shortly thereafter anyway once Mr. Bedoya was confirmed). What matters in the Microsoft-ActivisionBlizzard context is that when Mrs. Slaughter agrees with Mrs. Khan, they will work together, and in that SEP context they even did it in a way that drew harsh criticism from Mrs. Wilson for having broken with FTC tradition.

The Microsoft-ActivisionBlizzard merger review process is not about anyone wanting to make Mrs. Khan look bad. If anything, the NY Post leak gives the FTC an opportunity to build a consensus rather than risk a split vote.

The NY Post quotes former FTC chair William Kovacic:

"The way out is to say, ‘We got a great deal and only got it because we’ve been badasses.'"

A ten-year commitment to Call of Duty on the PlayStation would be an exit strategy for sure. It would be only a question of semantics whether that is a structural remedy (as the FTC has recognized, licensing can be structural, like a divestment) or a behavioral one. I would argue that a short-term license deal that still requires good-faith compliance because the desired effect cannot be achieved through justiciable commitments is probably more of a behavioral remedy, but a long-term license deal with a very clear standard (here, requiring that CoD be just as good and playable on the PlayStation as on the Xbox) is indeed a structural remedy, or at minimum tantamount to one. Ten years is really an eternity in this business, though I recognize CoD has been around for quite long. Ten years gives Sony every opportunity to improve its products and to acquire further exclusive content that Microsoft will have no reason to reduce its commitment to the PlayStation even thereafter.

The NY Post also plausibly says the Biden Administration may take it consideration "that Microsoft can be trusted to keep its promises because of its past history of responsible behavior."

The former FTC chair gave the NY Post a lot more information than the quote on the "great deal." With a source like that being disclosed, while other sources are not named, it is not just wishful thinking to believe that the NY Post really had some first-rate sources this time.

In my opinion, it is not clear why Mrs. Khan would be opposed to the deal at all, given that the mobile app store element of it actually has the potential to further her own agenda of limiting Big Tech's power. She could look at this like England's "balance of power" doctrine from the 16th century on: they didn't want a single continental European power to pose a threat. A Microsoft-ActivisionBlizzard mobile app store will make a key contribution in that regard.

What I can understand is that neither the FTC nor other competition enforcers (particularly the European Commission and the UK Competition & Markets Authority) want to embolden Big Tech companies to make aggressive acquisitions that cement monopolies. That is totally understood. I wouldn't want a Netflix-Disney merger (or Apple to buy both of them), Google to buy Toyota, Apple to buy Spotify, or Amazon to buy Wal-mart. But almost a year has passed since Microsoft and Activision announced their agreement, which still hasn't been consummated. That timeline tells something. The legal framework for merger control just doesn't support a blocking decision here, and it's hard to think of a Big Tech acquisition that can credibly help to open up a market (here, mobile app distribution).

There has been almost a year of uncertainty as evidenced by the spread between the price offered by Microsoft and the price at which ATVI stock is currently trading. That alone should serve as a lesson for Big Tech. Would it be an even stronger and clearer message if the FTC elected to sue? Not really, because it would likely be counterproductive. A lawsuit would further delay the process, and the stock market might get nervous about it if it happened. But losing such a high-profile merger case would be a disaster for the FTC and her chair. It would weaken the agency; it would make it harder to build majorities to bring cases; and at the end of the day, a defeat by the FTC could really encourage Big Tech players to make bold moves on the acquisition front, factoring in substantial delay but assuming that the FTC (and the DOJ) will lose in all likelihood.

The FTC should indeed take a tough stance on major Big Tech acquisitions, but it should also preserve its credibility as a competent competition authority.

All things considered, the scenario outlined in the NY Post makes more sense than any other that is on the table right now. That's why I wouldn't rule out that the NY Post got something right, and found out about something, that others didn't. Quite often, Politico and MLex have scoops, and I respect many of their reporters. But they are not games industry experts, and I believe none of them would claim to be.

As someone whose name once appeared in the credits of three of Blizzard's four most important franchises, I have my own perspective on this (as does Richard Hoeg, a lawyer who owns the Virtual Legality YouTube channel, where he comments on the intersection of games and the law). In this case the NY Post's take convinces me a lot more than what I've seen from, and heard about, the specialized publications' commentary, where I never got the impression that they ever understood how clear a case this one is for clearance if one considers all the publicly available facts and applies the legal standard to them. The Emperor has no clothes, and if it takes a court of law to tell that to the world, it will only get worse.