Revival of Microsoft-Activision Partnership

Should Microsoft Corp. successfully finalize its purchase of Activision Blizzard in the upcoming months, the $69 billion agreement will be remembered as a remarkable turnaround tale within the realm of mergers.

Last April, the biggest acquisition in the gaming industry seemed doomed. The takeover had been challenged by US regulators and blocked by their UK counterparts.

But Microsoft revived the purchase earlier this summer, deploying a bluff that pitted US and UK regulators against each other. And on Tuesday, Britain agreed to open a new investigation into the deal, following Microsoft’s offer to sell the cloud rights to current and future Activision games released over the next 15 years to Ubisoft Entertainment SA.

If the deal clears the UK’s new investigation, it could strengthen Microsoft’s position as the third-biggest player in the gaming world and spell a major defeat for ambitious competition regulators in the US and UK. This account of how Microsoft outsmarted regulators to transform its fortunes is based on interviews with more than a dozen company executives, advisers and competitors.

Microsoft first announced the acquisition in early 2022. Trouble came in December 2022, when US regulators filed an administrative challenge to the deal. Then in April 2023, UK competition authorities at the CMA, led by Sarah Cardell, blocked the takeover, bluntly saying it threatened competition in the multi-billion dollar gaming market. The US Federal Trade Commission, chaired by Lina Khan, scheduled the trial for August, weeks after Microsoft was given a deadline to close the acquisition or face a $3 billion severance payment.

But the software giant led U.S. executives to believe it was considering an extreme move: finalizing the purchase against Britain’s veto, a move that provoked the FTC to file a federal lawsuit — a legal battle the company’s lawyers predicted it would win. In reality, Microsoft was secretly seeking to make peace with UK regulators and had no intention of circumventing the veto. Neither situation is fully resolved: Microsoft and Activision are now awaiting a decision from UK regulators on a new investigation, and the FTC is appealing a July 11 court ruling that upheld the acquisition. Since the European Union’s competition authorities approved the acquisition in May, Microsoft’s new proposal for the UK does not apply to the continent. But the EU may have to reopen its investigation after Microsoft’s new approach to the UK.

But Microsoft’s persistence has brought it back from the brink. Now it’s moving toward a new completion date this fall, though with no guarantee that the new proposal will address concerns and get the green light.

Microsoft, Activision, Sony and related regulatory agencies declined to comment for this story.

Mission to Brussels

Most of the opposition to Microsoft’s monster bid for Activision came from Sony, whose Playstation is the world’s number one game console ahead of Microsoft’s Xbox.

Sony’s success depends on access to hit games like Activision’s Call of Duty. The company estimates that in 2021, 6 million Playstation players spent around 70% of their time playing Call of Duty, and 1 million spent all of their time playing the game. It feared that if the acquisition went through, Microsoft would have the power to remove the game and other popular Activision games from Playstation, putting billions in revenue at risk.

The FTC’s lawsuit against the deal mirrored Sony’s position: When Microsoft owned Activision, it could withhold popular games from competing video game consoles and game subscriptions.

The agency filed its lawsuit in an internal court, where its administrative law judge will hear the government’s arguments in a trial to be held in August.

Other regulators followed the FTC’s lead. On January 31, EU competition authorities presented their formal antitrust rulings, which largely concerned access to Activision’s console and PC-based games.

However, Microsoft insisted that it still had chances of acceptance. It planned to get the UK and EU authorities to accept a remedy based on agreements with competitors and then return to negotiations with the FTC.

In Brussels, Brad Smith, Microsoft’s chief legal strategist, started the lobbying phenomenon. He opposed the sale of Call of Duty as part of the remedial package, while also announcing deals with rivals Nintendo Co and Nvidia Corp. to keep Activision games on those platforms for 10 years.

Thanks to the efforts of Smith and Microsoft Gaming CEO and Xbox chief Phil Spencer, advisers to Microsoft and Activision were feeling confident by the end of April and even boasted to news outlets that the deal would close in the next few weeks.

Then, on April 26, everything came to a screeching halt when the CMA vetoed the acquisition.

Head fake

The U.K. decision focused exclusively on cloud gaming, a small but growing segment of the industry where gamers stream games to devices like cellphones and smart TVs rather than using a console — like Netflix Inc. and Hulu, but for gaming.

Martin Coleman, chairman of the independent panel that reviewed the deal, said Microsoft’s already dominant position in cloud gaming would give it an edge over its rivals. Microsoft’s proposed remedy, including agreements to allow competitors to offer Call of Duty and other Activision games on their own platforms, would require too much regulatory oversight, the UK found.

Microsoft and Activision immediately announced they would appeal. But that would be a long shot. The UK agency had never before changed the outcome of a merger through the appeals process.

EU regulators also focused on cloud gaming. But unlike in Britain, officials in Brussels welcomed Microsoft’s side deals. Margrethe Vestager, the EU’s competition chief, told a small crowd of reporters that the acquisition would “jumpstart” the cloud streaming industry, which represents just 1-3 percent of the entire gaming market. The deal will bring Activision’s popular games to the cloud, which would expand the choice of games for consumers, he said. The EU approved the purchase on May 15, but with conditions. Microsoft should license Activision’s content to EU game streaming providers and hire a monitor to enforce compliance. With that approval in hand, Microsoft and the Activision team focused on appealing the UK veto. On May 30, the Court of Appeal agreed to hold a fast-track hearing starting in July, with a quick schedule that could return a quick decision. Then on June 6, Microsoft’s Smith met with UK Chancellor Jeremy Hunt. Hunt had publicly questioned the CMA’s decision, but still acknowledged the body’s independence from government. After the Hunt meeting, Smith said, “If there are problems, we want to solve them.”

In the first week of June, reports surfaced of a bold move by Microsoft: bypass the UK veto order, continue trading and pull Activision out of the UK market entirely – that is, shut down in all countries except the UK.

Suddenly, the FTC found itself in an impossible situation. The case was scheduled to be heard in August in its internal court, which only decides on the legality of the merger; to prevent the deal from closing, the agency must prevail in federal court, where it often faces judges who are skeptical of the executives’ arguments. Now the timeline for preparing the legal challenge had been shortened.

The FTC had delayed going to federal court in December because Microsoft could not legally complete its purchase due to ongoing antitrust reviews in the UK and EU. This results in fines of up to 10 percent of Microsoft’s annual revenue in the EU. Additionally, the CMA’s April veto of the deal prevented the merger from closing globally, obviating the need for a US court order.

For Microsoft and Activision, ignoring the UK veto could be costly – up to 5% of Microsoft and Activision’s combined global revenue. Or Microsoft could pull Activision out of the country entirely, another expensive proposition – the UK is the game maker’s second largest market.

After reports spread that Microsoft had toyed with circumventing the deal, the FTC asked the company for written permission not to close without the U.K., people familiar with the negotiations said. But the company’s lawyers refused to give such an assurance.

Microsoft had forced the FTC’s hand. On June 12, the agency sued in federal court in San Francisco, citing the risk that Microsoft and Activision would end the deal despite the UK’s veto.

In fact, Microsoft and Activision never intended to close the deal without Britain’s consent, people familiar with the negotiations said – it had all been a sham. But Microsoft’s deception had allowed it to argue the point publicly.

Litigation

In court, the FTC tried to convince Judge Jacqueline Scott Corley that Microsoft would have an incentive to withhold Activision’s popular games from Sony.

However, it was unable to produce emails suggesting such an agenda and could not get its own witnesses, including Microsoft CEO Satya Nadella, to admit it. During the trial, Corley reminded the agency’s lawyers that the court was concerned with potential harm to consumers — not Sony.

Microsoft’s job would be to undermine the FTC by undercutting Sony. Its lawyers tried to show that regulators had exaggerated Sony’s concerns about the future of Call of Duty and other popular games.

To guide the lawyers during the trial, the Microsoft team enlisted the help of Spencer, the head of Xbox. To get eyewitnesses, the team turned to Sarah Bond, who oversees Microsoft’s relationships with thousands of game developers and partners, and Bobby Kotick, CEO of Activision Blizzard.

During the trial, Microsoft’s lawyer read aloud emails that Jim Ryan, a Sony Playstation executive, sent to another Sony executive just after the purchase was announced. In an email, Ryan said he’s been waiting for Call of Duty “on PlayStation for many years.” While he preferred “this didn’t happen,” the company would be fine, he wrote. Both Nadella and Spencer also promised that Microsoft will keep the game on PlayStation.

On July 11, Corley ruled against the FTC, saying the agency had not shown how the merger would harm players. The court later rejected the FTC’s request to block the acquisition when the agency appealed his decision to a higher court.

Microsoft’s lawyers referred Corley’s decision to the CMA, emphasizing its view that the deal would promote competition. Microsoft had already been in talks with UK regulators about a possible remedy to ease their concerns, but authorities would only consider that option if the company dropped its appeal. With Corley’s ruling now at hand, Microsoft agreed to stay the UK proceedings at the request of the CMA.

Within an hour of Corley’s decision, the CMA, in an unprecedented move, agreed to give Microsoft a second chance to ease UK concerns about the purchase. Lawmakers had accused Cardelli of buckling under political pressure from lawmakers, who worried the bloc could slow investment in Britain’s tech industry.

In an interview with Bloomberg, Cardell denied that the agency had given up. He reiterated that the CMA, as a unit of the ministry, does not act on such intrusion.

Within days of the court victory, Microsoft reached an agreement with Sony, albeit one that is in some ways less favorable to Microsoft’s larger competitor. When the acquisition was announced in 2022, Spencer had offered Sony a five-year license to all 50 Activision games currently available on PlayStation. By July 2023, Sony and Microsoft reached a 10-year deal – but only for Call of Duty.