On Thursday, Microsoft opened a weeklong hearing that will decide whether its $69 billion bid to purchase video game behemoth Activision Blizzard should be temporarily blocked with a warning: If a federal judge grants the injunction that the Federal Trade Commission is seeking, the deal won't go through.
"If we can't close by July 18, and the court enjoins the transaction," Microsoft's lead attorney Beth Wilkinson said, "nobody can withstand that and we certainly can't." She stressed that siding with the FTC in the case will drag the company into a "three year administrative nightmare" that will doom the deal.
The argument set the stage for a mini trial in federal court in San Francisco between Microsoft and the FTC. The agency in December sued to block the merger, arguing that it will enable the tech giant to suppress competition in gaming. If approved, the deal will marry Microsoft, which owns the Xbox console and a game streaming service, with Activision, maker of Call of Duty, Diablo and Candy Crush, as the company maps out an aggressive expansion of its gaming arm.
The FTC's suit represents another aggressive step taken by competition regulators to rein in consolidation of the tech industry. For the agency, its ask for a preliminary injunction to pause the deal goes beyond this particular case. The FTC was forced to sue in federal court because Microsoft and Activision indicated they could close the deal at any time without further notice before its legal challenge in its internal court is resolved. That trial is set to start Aug. 2, past a contractually-obligated July 18 deadline to consummate the purchase.
"This case is not about whether the deal should go forward," said the FTC's lead lawyer James Weingarten in court on Thursday. "This case is about whether the FTC should have its chance to evaluate the antitrust merits before the deal closes."
During his opening remarks, Weingarten argued that the merger will harm gamers. Microsoft could, he said, decide to make Activision content exclusive to Xbox or degrade the quality of its games on competing consoles. He pointed to the company's purchase in 2020 of ZeniMax, parent company of Bethesda Softworks and maker of The Elder Scrolls, Fallout and Starfield, for $7.5 billion. After the acquisition, Microsoft made one of ZeniMax's most popular titles, Starfield, exclusive to Xbox and Windows despite assuring to European competition regulators that it wouldn't limit games on rival consoles.
In response, Wilkinson emphasized the competition that Microsoft would bring to the gaming industry, if the deal is greenlighted, by challenging Sony's dominance.
"For almost 20 years, Sony has been leader in the console market," the Wilkinson Stekloff partner and former federal prosecutor said. "Sony has big margins and [Microsoft] is looking for an opportunity to move people away from consoles and provide more games on more devices to more people."
Sony, maker of PlayStation, has emerged as a major opponent to the deal. In an appeal to a federal appeals court, gamers in a civil suit also looking to block the merger cited an internal, redacted Microsoft email that they said was "uncontroverted evidence that Microsoft had the intention to put its main competition, the Sony PlayStation, out of the market." The message was allegedly sent by Matt Booty, head of Xbox game studios, who testified on Thursday, to Tim Stuart, Microsoft chief financial officer for Xbox.
Wilkinson, however, argued that Sony is only opposing the deal to stave off competition. In an email she cited from Sony's PlayStation chief Jim Ryan to former Sony CEO Chris Deering, he stated that the merger "is not an exclusivity play at all," referring to the possibility of Microsoft making Activision content solely for Xbox. "I'm pretty sure we will continue to see Call of Duty on PlayStation for many years to come," the message continued. "We'll be okay. We'll be more than okay."
Additionally, Wilkinson questioned the financial incentive for Microsoft to pursue exclusivity on Activision games since doing so would mean giving up cross platform sales.
"The government is suggesting to you that somehow, Xbox, which is in need of those revenues, would somehow forego that as the smallest player in the market," she told U.S. District Judge Jacqueline Scott Corley. "[Gamers] make it very clear to Xbox that they want to play Call of Duty on different consoles."
That argument was tested when Pete Hines, Bethesda's head of publishing, took the stand. He was grilled by the FTC on numerous instances when Microsoft reneged on commitments to release ZeniMax's games across multiple platforms after the company was acquired. On top of Starfield, those titles may include Redfall and Elder Scrolls 6, the FTC said.
Hines indicated that an Indiana Jones game was meant to be a multiplatform title before ZeniMax was purchased in 2021 by Microsoft. Disney signed a licensing deal with ZeniMax prior to the acquisition. The entertainment giant preferred for the title to be released on as many platforms as possible, but Microsoft had other plans.
Asked by Corley why the deal was amended, Hines answered that it was "about reducing risk" to get the game out on time.
"When you originally negotiated, all of those same considerations were there," Corley responded.
Hines said that Bethesda is a "small independent publisher" and "can't afford to miss."
Another casualty of Microsoft's buying spree of game studios includes Outer Worlds 2, which Booty said may be exclusive to Xbox. He added that Phil Spencer, CEO of Xbox Game Studios, has the final say on exclusivity.
The hearing will continue on Friday and into next week. Witnesses expected to testify include Microsoft CEO Satya Nadella, Activision CEO Bobby Kotick and Spencer.
The merger has been greenlighted in several countries, including the European Union, Japan and China, but the U.K. blocked it due to concerns that it would allow the company to corner the cloud gaming market in a decision that was appealed by Microsoft. Competition enforcers in New Zealand on Tuesday also said that the deal is "likely to substantially lessen competition due to vertical effects in the distribution of video games for cloud gaming services."
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