Microsoft-Activision Challenge Tests FTC Emerging Markets Focus

The Federal Trade Commission’s challenge to Microsoft Corp.‘s $68.7 billion bid to acquire Activision Blizzard Inc. will help define the scope of its ability to police over-the-horizon competitive threats.

The agency argues the deal not only would choke off gaming console market competition, but would tilt the playing field in still-developing markets for subscription and cloud-based gaming.

That focus is integral to the FTC’s aggressive approach to policing Big Tech under chair Lina Khan. But blocking a merger to head off concentration in emerging markets is tougher than moving against conduct in established ones, attorneys say.

“There are a couple challenges here. One is that judges like to see evidence, and evidence is inherently backward-looking,” Barry Nigro, the head of Fried Frank’s global antitrust department, said. “Having a good story to tell based on documents and testimony becomes more important in these sorts of cases—otherwise it’s one side’s vision against the other’s.”

Khan has trained the FTC’s attention more on anticipating competitive threats rather than waiting for markets to mature. She has said former antitrust regulators were too concerned about throttling innovation, or believed that competition in emerging digital and tech markets was too dynamic for any one player to become dominant.

“Now we’re at the point two decades on where we realize that not only was that flawed, but in fact, the inverse of the truth, where we need to be acting much more quickly in these markets in some instances,” Khan told a gathering of the National Association of Attorneys General Dec. 7.

Emerging markets—where competitive dynamics and bedrock technology are still developing—defy the analysis required of the antitrust enforcers when convincing courts to block mergers. It’s difficult to compile consistent data to convince a court that a merger could affect concentration in evolving markets, agency watchers said.

The FTC faces a tough battle in proving anticompetitive effects in such markets, said Stephen Calkins, a professor at Wayne State University Law School.

“If you put together enough market share in a single market, there can be a presumption of anticompetitive market effects, and we’re well on our way to saying its an anticompetitive market,” Calkins said. “If you have a market without any sales yet, it’s hard to have market share.”

Microsoft is pushing back against the FTC’s allegations.

“We have been committed since day one to addressing competition concerns, including by offering earlier this week proposed concessions to the FTC,” Microsoft president Brad Smith said in a statement. “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.”

‘Tipping Points’

The vertical merger will give Microsoft control over a swath of popular Activision video games. The tech giant—and maker of the Xbox console—could block those games from consoles made by rivals Sony Group Corp. and Nintendo Co., the FTC alleged.

Two other markets could face anticompetitive harm as a result of the merger, the FTC argued: multi-game content library subscription services, where players pay for a Netflix-like service that enables blanket access to a variety of games, and cloud-based gaming subscriptions.

“Microsoft has already shown that it can and will withhold content from its gaming rivals,” said Holly Vedova, director of the FTC’s Bureau of Competition, in a Dec. 8 statement. “Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”

Both markets could face any number of upheavals in the near future, said video game analyst Michael Pachter of Wedbush Securities. Although companies have made forays into both, neither market is settled and could face significant upheaval over time, he said.

Microsoft’s Xbox Game Pass allows players to download hundreds of games to their console for $9.99 a month. For another $5, they can stream those games from the cloud, avoiding download times and maxing out their storage. They’re one of several companies to make forays into such subscription services.

Streaming games directly from the cloud is a more uncertain market. Google spent years trying to popularize its version of the technology, called Stadia, only to announthe service would be shuttered on Jan. 18.

Khan has increasingly worried about what she’s called “tipping points” in digital markets, where one leading competitor becomes dominant virtually overnight after reaching a technological and competitive threshhold.

Such companies can be particularly hard to dislodge due to network effects—the feedback loop that increases a service’s value for users based on the number of other users on it—Bloomberg Law analyst Eleanor Tyler said.

The phenomenon incentivizes users to stay where they are, as interlocking features such as chat rooms, “friending” functionality, troves of data, and anniversary reminders stack up over time. Network effects can ensconce companies as the dominant firm in a market, raising high barriers to entry—a major concern for enforcers, Tyler said.

The FTC is making a similar argument about competitive threats as it attempts to unwind Meta Platform Inc.‘s acquisition of Instagram and WhatsApp.

“They would say that too often, the incumbents are taking the easy way out by acquiring innovative products rather than investing in innovation themselves,” Nigro said in describing the agency’s stance. “Given their incumbency, they should not be able to buy out a future potential competitor or the source of a critical input. Instead they should have to invest in that innovation themselves.”