Right before the midnight Pacific Time deadline, Microsoft and Activision Blizzard filed their (joint) opposition to the Federal Trade Commission's motion for a preliminary injunction:
The above PDF contains all of the publicly available exhibits. The only public exhibit that is missing from the PDF for technical reasons is a shareholder report by Sony that can easily be obtained elsewhere. As usual, the expert reports are not made public.
While heavily redacted, the following passage from the court filing is revealing and potentially damning (click on the image to enlarge or read the text below the image):
"First, there is no evidence to support to support the FTC's central tehory that Xbox will take COD away from PlayStation. The FTC does not cite a single document or witness even suggesting this will happen. On the contrary, Jim Ryan, the CEO of Sony Interactive Entertainment ('SIE') and the chief commercial opponent of this deal, said privately on the day it was announced [REDACTED]"
It is not unheard of that an executive reacts to a merger announcement in one way and later, with a view to regulatory reviews, takes the opposite side. I remember a private email exchange I had with someone well over 10 years ago about a merger, and in that case the person stated clearly in the email that the merger was about an incumbent eliminating a nascent competitor--but a few months later he'd meet with the European Commission and say the opposite.
If it is well-documented that Sony wasn't truly worried about vertical input foreclosure, why is the FTC still clinging to that console market theory of harm? Why isn't the venerable agency instead trying to achieve a great outcome for competition and for gamers?
The console market theory of harm--according to which Microsoft's Xbox would cause anticompetitive harm to Sony's PlayStation--has been universally rejected. The regulators in charge of 39 countries have approved the deal, and in a 40th country--the United Kingdom--a blocking decision (which is now being appealed) issued, but the console market theory of market was previously thrown out.
Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California agreed (further to a motion by the merging parties) to schedule up to five trial days, the first one of which will be Thursday (June 22). Having read the FTC's complaint and TRO motion as well as the defendants' opposition brief, I can't see how the FTC would possibly prevail.
I downloaded the public version of the opposition brief immediately upon its filing and, in parallel to reading it, commented on it in a 45-part Twitter thread that mostly consisted of quotes from the brief:
I'll share some key quotes here.
— Florian Mueller (@FOSSpatents) June 17, 2023
"The U.S. antitrust agencies have rarely sought to enjoin
vertical mergers and have lost every recent case when they tried. Indeed, the FTC is asking this Court to be the first in decades to find a vertical merger unlawful."
🧵1/X
I'll also discuss it in detail in a Twitter Space at 12 noon Eastern Time today that will be recorded.
In this blog post I'll just summarize quickly what the issues and the defending parties' "attack vectors" are.
Legal standard; term and type of injunction; evidentiary burden
The FTC and the merging parties refer to the Ninth Circuit's 1984 discussion in FTC v. Warner Communications: in order for the FTC obtain a preliminary injunction, the evidence must "raise questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination." But the defendants say the FTC can't get there on the basis of "scant proof." Instead, it has the burden of proof to obtain the "extraordinary and drastic remedy [of] a preliminary injunction prior to a full trial on the merits" (as the D.C. Circuit explained in its 1980 FTC v. Exxon decision).
The issue here is not that what the FTC is seeking is downright impossible under the law, but that five case-specific factors up the ante for the agency:
The FTC is not seeking a "hold separate" PI, but wants to kill the merger. Practically speaking, the merger is indeed dead if the FTC prevails here. The FTC makes it sound like the trial before its in-house Administrative Law Judge (ALJ) is just around the corner (starting August 2), but the PI would in fact be in place for about a year or two. After the August trial, it will take the ALJ several months to render a "recommended decision" (which used to be called "initial decision" until the FTC changed it, apparently just in time for this case). If he blocks the deal, it will take an appeal to a federal appeals court to get that decision reversed; if he throws out the FTC's complaint (which would be the logical thing to do given its apparent shortcomings), the commissioners can just make the decision themselves, which would add a considerable amount of time to the process (possibly even another year) and the outcome of their vote would be a foregone conclusion, meaning that an appeal would be required then.
Microsoft has so far held all of its acquired game studios separate. A divestiture in a hypothetical scenario in which the FTC were to prevail further down the road would be feasible. And even though it would take years, the harm that the FTC alleges, based on an expert report that apparently looks like it's from an alternative universe, would not even really materialize by then.
In a strictly legal sense, this goes to the equitable analysis. But it's obvious that the burden of proof must be reasonably heavy here, as the likelihood of the FTC's doomsday scenario will also go into the balance of the equities.
Vertical mergers have not been blocked in the U.S. for decades. The FTC and DOJ normally didn't even try--and when they did so in recent decades, they just lost in court.
My personal opinion is that the pendulum should indeed swing back.
I am philosophically way closer to the FTC and its current chair than it may seem at first sight (the opposite of "objects are closer than they appear" in a car's side-view mirror). There has undeniably been underenforcement, even in connection with horizontal mergers. Thought leaders pushing for a trend reversal--I specifically also mean Lina Khan--were and are needed--but that is why I find it doubly unfortunate that they're picking the wrong target: a deal that actually spurs competition between large companies, and where the acquirer appears exceedingly cooperative. They don't want a good thing to happen, and they'll most likely lose without achieving anything that will help them next time.
Case in point, the UK CMA has now granted fast-track approval to Amazon's acquisition of iRobot, the company that makes the Roomba home robot. That deal has been described as "the most dangerous, threatening acquisition in [Amazon]'s history". It's conceivable that if the CMA had not tilted at the windmill named Microsoft-ActivisionBlizzard and (rightly!) faced major backlash for doing so (raising the question of whether Britain was "closed for business"), it might have been able to spend some political capital on that one.
The burden of proof is particularly high for attempts to block vertical mergers in the United States.
Courts also tend to be rather skeptical of nascent-market theories where harm is predicted to occur further down the road, looking beyond the horizon of what is reasonably predictable.
The opposition brief also notes the following:
"Defendants are aware of no case where a court has blocked a merger to protect a dominant firm's position."
It is counterintuitive at best that even according to the FTC's own theory, the allegedly terrible consequences of the merger would simply be that the market leader loses a few percent of its market share. Frankly, that would be a strong basis for a motion to dismiss, but obviously the roadmap here is that the PI hearing will start next week.
Many mergers are cleared on the basis of companies convincing regulators (or, if need be, courts) that they don't have an incentive and, therefore, don't intend to engage in certain kinds of behavior, particularly foreclosure. But "[t]his is the exceptional case where the Court can rely on actions rather than words." There are agreements in place, and they are in fact even being implemented as my timeline chart (the most recent version you can find here) also indicates. People are already playing games via cloud streaming as a result of those actions.
Market definition
As always, antitrust analysis starts with market definition, i.e., with identifying the area in which there is, in fact, competition.
When I saw the FTC's in-house (administrative) complaint in December, I was instantly reminded of an Apple Arcade class action in the Northern District of California that was thrown out (never to be seen again). When I made that connection in my headline, it was unforeseeable and, in fact, unlikely that the FTC's PI motion would later be brought in the same district. But that makes the Pistacchio decision more relevant now. It was about gerrymandering a market definition by focusing on a particular payment method as opposed to product or service offerings that can substitute each other. Multi-game subscription services are clearly just one of many means of paying for games.
In December, the FTC started with three markets: consoles; multi-game subscription services; and cloud-gaming services. In the Northern District of California, it can't come up with entirely new theories of harm because it must argue that it is reasonably likely to prevail on the theories in the in-house adjudicative proceeding. But the FTC is now trying to modify those market definitions a bit. The FTC has thrown two more market definitions into the mix: one where the console market is not limited to Sony and Microsoft, but does include Nintendo (however, it still doesn't include PCs), and another where any service that offers multi-game subscriptions and/or cloud streaming of games is included.
The opposition brief presents strong reasons for rejecting those new market definitions as well.
However, looking at it in statistical terms, it's fairly possible that one or more of the FTC's proposed markets may survive the market definition stage.
Theories of harm in the various proposed markets
The console market and multi-game subscription service theories that have failed everywhere else in the world are not even worth discussing further here. Those theories made no sense even before that "non-smoking gun" was found in the form of some Sony-internal communication.
On the cloud gaming side, a Sony statement comes in handy, too:
Now that #Sony says cloud gaming isn't displacing consoles anytime soon, it should be even easier for the @CMAgovUK to work out a proportionate remedies package.
— Florian Mueller (@FOSSpatents) June 4, 2023
Or for the @CATribunal to declare a worldwide block irrational.#UnblockABK https://t.co/Do8Hz8dmKL
The FTC must basically tell the court to attach no weight to the agreements Microsoft has signed and begun to implement with rival cloud streaming providers and the commitments vis-Ã -vis the European Commission into which Microsoft has entered (which are valid worldwide). And even the FTC's own expert once argued (PDF) that the exclusive availability of games on particular platforms was actually procompetitive.
Just like the CMA, the FTC faces the problem that Activision Blizzard has been very clear about not intending to make its games available through multi-game subscription services and on cloud-gaming services in a way that would cannibalize its traditional sales.
As counterintuitive as it may seem, the ones who are fighting this transaction are doing competition a disservice, and those who are advocating its clearance are promoting competition, innovation, and customer choice.
The FTC will file its reply brief in a few days, and then the parties will submit their proposed findings of fact and conclusions of law, which will discuss in more detail how either side seeks to persuade Judge Corley.
