Microsoft Denies It Would Withhold Activision Titles From PlayStation, Post-Merger

FTC and Microsoft attorneys, in opening statements of Thursday’s evidentiary hearing on the commission’s motion for a preliminary injunction to block Microsoft’s Activision Blizzard buy, spent considerable time debating the fate of Activision’s signature Call of Duty franchise on Microsoft’s rival Sony PlayStation platform if the transaction goes through. The hearing is scheduled to continue over portions of the next four days (see 230615000).

It’s inevitable that new Activision owner Microsoft would have the ability to “foreclose” the availability of Call of Duty on PlayStation, FTC attorney James Weingarten told U.S. District Judge Jacqueline Scott Corley for Northern California in San Francisco. But there would be no financial or public relations rationale for Microsoft to do so, countered Microsoft attorney Beth Wilkinson of Wilkinson Stekloff.

Activision makes “some of the most successful videogame content in history,” said Weingarten. “If this deal is completed, the combined company will have, is likely to have, the ability and incentive to harm competition in various markets,” including consoles, subscription services and the cloud, he said.

The “posture” of the FTC’s claims against Microsoft/Activision is “different than the usual preliminary injunction,” said Weingarten. “This case is not about deciding whether this deal should go forward,” he said. The agreement doesn’t automatically terminate July 18, contrary to what Microsoft and Activision have asserted, he said. “That’s just the option date for the parties to either renegotiate or walk away,” he said.

Even if Microsoft and Activision were to abandon the transaction if Corley grants the government’s preliminary injunction, “that’s legally irrelevant,” said Weingarten. The case isn’t about whether the deal “should ultimately close,” he said. It’s about whether the FTC “should have its chance” to review it in a congressionally authorized administrative proceeding on the transaction’s “antitrust merits,” before it closes, he said.

Once Microsoft owns Activision’s content, it “will have the ability to withhold it,” to raise rivals’ prices or to change the terms and conditions of access to Activision content, said Weingarten. Microsoft also could “degrade” Activision content on “rivals’ products and services,” he said.

“Total foreclosure,” in the form of Microsoft’s ability to withhold Activision content from the PlayStation, isn’t “the only possible harm here,” said Weingarten. “Partial foreclosure” describes the “myriad strategies that are available to the combined company to affect its rivals,” he said. Microsoft could decide on day one, for example, to make an Activision game available only on Xbox, and “maybe it only comes to PlayStation or to a rival cloud service a year later,” he said. He urged the judge not to “take the red herring of thinking this case is about whether a game is just going to be completely yanked from a rival,” he said: “That’s not the only likely harm.”

Weingarten urged the judge not to be swayed by evidence that Microsoft and Activision will introduce showing that the transaction could enhance competition in mobile gaming. Even if Microsoft, post-Activision, is able to break the Apple-Google “duopoly” in mobile gaming, “that’s legally irrelevant,” he said. “You can’t offset a harm that you’re going to demonstrate in all of these other markets with a possible benefit in a different market,” he said.

Microsoft genuinely has “no idea” what the FTC is claiming “would actually happen” if there were even "partial foreclosure" emanating from the transaction, said Microsoft attorney Wilkinson. The idea that Activision would intentionally degrade the version of Call of Duty that it licenses to PlayStation would only reflect badly on the game developer and incur the wrath of gamers throughout the world, she said.

When Microsoft announced its proposed Activision buy in January 2018, “it was all good news for consumers,” said Wilkinson. Microsoft “is looking for a way to move people away from consoles and be able to provide more games on more devices to more people,” she said. “That model will allow people, after this transaction, to be able to play Call of Duty in many more places,” she said.

When FTC counsel argues Microsoft would be able to withhold Activision games from rival platforms like PlayStation, “they literally cannot do it” due to the various license agreements in place, said Wilkinson. Sony has become the “complainer in chief” in this case, she said. “They are the ones that are worried about what’s going to happen to them,” she said. “This is one of the most unusual vertical merger cases,” she said. “There’s never been one like this,” where the FTC is “actually protecting the dominant player, Sony, and trying to maintain the status quo, when one of the smaller players is trying to become more competitive,” she said.

It would make no sense economically for Microsoft to withhold Activision content from PlayStation because the Sony platform accounts for the lion’s share of Activision’s console revenue, said Wilkinson. It also would upset the market in multiplayer gaming because two-thirds of the gamers who play Call of Duty online do so on the PlayStation platform, she said. Gamers “make it very clear to Xbox that they want to play Call of Duty on all these different consoles.”

Activision is contractually obligated to license Call of Duty for PlayStation through 2024, so nothing would happen before 2025, said Wilkinson. Microsoft, post-Activision, is willing to give PlayStation the rights to Call of Duty for 10 years after the current contract expires, she said. That’s an “unheard of length of time,” she said. Microsoft also is willing to give Sony “release-date parity,” she said. “The offer allows them to get the same thing that Xbox will get,” she said. Despite the offers of an extended-length contract and release-date parity, Sony doesn’t know “how to say yes,” she said. “They refuse to negotiate and figure out how to get this content and work with us to come to an agreement.”

Corley’s ruling on the motion for injunctive relief will decide for Microsoft “whether the deal moves forward,” said Wilkinson. “If we can’t close by July 18, and the court enjoins the transaction, to go through the three-year administrative nightmare, no one can withstand that, and we certainly can’t,” she said.