Microsoft-Activision deal faces first antitrust test

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Microsoft-Activision deal faces first antitrust test

President Joe Biden's antitrust regime is facing its first big test in less than three weeks into 2022, less than three weeks into the year. Microsoft Corp.'s $69 billion all-cash takeover of Activision Blizzard Inc. brings together two major gaming platforms in a deal that directly affects consumers and could also cause grievances among some of the tech giant's biggest rivals.

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Microsoft isn't exactly under the radar in Washington with its $2.3 trillion market valuation. It is less retribated than companies such as Google parent Alphabet Inc. or Meta Platforms Inc. s Facebook, which are already in the crosshairs of antitrust enforcement officials at the Justice Department and the Federal Trade Commission.

It is not yet clear whether the Justice Department or the FTC's antitrust division, which share merger enforcement, will review the Microsoft-Activision transaction. The agreement is likely to get an extensive review, and both organizations are ready to increase their scrutiny of deals in general. They announced Tuesday that a new framework is needed to combat a surge in potentially anticompetitive transactions.

A tie-up that will be closely scrutinized by regulators will likely be the combination of Activision's gaming portfolio with Microsoft's consoles and hardware systems, according to Elevation s Betty Chan in a note Tuesday. The deal is expected to require approvals from the U.S. European Union and China.

Microsoft s last major takeover, a $17 billion deal to buy transcription software maker Nuance Communications Inc., was approved by the U.S. regulators and the European Union last month. The Competition and Markets Authority of the United Kingdom is still reviewing the transaction.

Microsoft s gaming business already includes the Xbox console and a list of popular titles, including the Halo franchise and Minecraft virtual-world building game. Microsoft presented itself as the No. in its statement announcing the deal. The idea of big tech breakups has been brought into the spotlight due to an executive order signed by Biden last year, which made it clear that addressing consolidation among industries was a top priority for the administration, while Lina Khan's ascendancy to the top of the FTC.

Microsoft has tried to set itself apart from the other big technology companies, touting its cooperation with small businesses and rival programs, while criticizing its competitors and backing their detractors in major lawsuits.

Microsoft has evaded scrutiny from Apple, Google and Facebook because of its image rehab after its own antitrust fight two decades ago, and partly because it lacks strong businesses in some of the areas most in the spotlight, such as social media and internet advertising.

The FTC, for example, has been looking to unwind Facebook's acquisitions of Instagram and WhatsApp, arguing that the deals were part of a strategy by Chief Executive Officer Mark Zuckerberg to eliminate companies he saw as competitive threats by buying them. The Justice Department is looking into Alphabet's digital advertising market practices.

While the companies are still digesting the news of Activision's deal, many are privately wondering if this could be the catalyst that brings Microsoft into the antitrust fray they've been dealing with for years, according to people familiar with their thinking.

The outcome of the government review will help clarify whether regulators plan to give Microsoft s deal activity the same level of scrutiny as they do to the other big tech firms, New Street Research analysts wrote in a note. A Meta acquisition of Activision would almost certainly be challenged, they said.

If the government does not challenge the Activision deal, it will reveal a competitive disadvantage for Meta relative to Microsoft, New Street said. Under the set of government rules, Microsoft can compete in virtual reality via acquisitions, while Meta's acquisitions in this area will face more scrutiny. Gaming, an already-mainstream activity that has grown in popularity during the Pandemic, is an industry that regulators or politicians eager to make a talking point because it is part of so many Americans daily lives.

Additions of Activision titles such as Call of Duty and World of Warcraft would help Microsoft expand its offerings for the Xbox, and push it into the fast-growing markets for mobile gaming and the metaverse. According to a person familiar with the matter who asked not to be identified discussing private information, the companies are likely to argue with regulators that a deal will help them stay competitive in this evolving tech ecosystem, even though the concept of what the metaverse is comprised of hasn't yet been fully established.

Regulators are likely to look closely at how Microsoft has the ownership of Activision could harm its rivals by limiting access to the company's biggest games. The latest of the Call of Duty franchise was called Vanguard last year, according to data from The NPD Group. Game makers like Electronic Arts Inc., which makes the Battlefield titles and the EA Sports franchise, could be worried that Activision's games would be given preference over theirs on the Xbox platform.

Jennifer Rie, a Bloomberg Intelligence spokesman, thinks that an objection on those grounds would have little chance of success.

The FTC or DOJ would have to show that, post-merger, Microsoft would have both the incentive and the ability to foreclose rivals by virtue of owning Activision assets, said Rie. We believe that an argument for either one would not be successful in court. None of the work from home is a permanent part of how jobs are done.

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