Microsoft Faces Its Biggest Challenge Despite Its "Social" Standing

Microsoft's CEO Satya Nadella’s and Vice Chair and President Brad Smith face their toughest challenge.  There was always the belief that so long Microsoft acted like a “good citizen” on social issues they would be immune to anti-trust.  That myth has been burst.  The FTC has filed a lawsuit and a judge must decide if the case is strong enough to block the $69 billion deal.  To be blunt, the FTC fears Microsoft will not provide titles for other platforms.  Other headwinds include 16 countries that will have to approve the mega deal.  China will probably block the deal to protect TenCent's position.  Tencent also owns 5% of Activision.

"This is a battle for the future delivery of gaming and gaming platforms," Ray Wang at @constellationr explains as the FTC puts the brakes on Microsoft’s $75bn deal to buy Activision Blizzard. #CallofDuty #MSFT pic.twitter.com/2gvYQHIG1X

— Dan Murphy (@dan_murphy) December 9, 2022

Digital Giants Operate On A Different Dimension And Playbook

Should the deal be completed, Microsoft will become the third largest gaming player by revenue as they reach 3 billion users behind Tencent (#1) and Sony (#2).  Activision brings 31 million monthly active users (MAUs).  Xbox gaming brings 20 million users to the mix.  At the surface, Microsoft's argument about industry competition makes sense for the $200 billion gaming market. However, digital giants are collapsing industries into value chains.  A software company, gaming company, telecom company, and entertainment have collapsed value chains along four common elements:

• Content - titles, movies, software
• Network - monthly active users and subscribers
• Distributions channels - stores, cloud (Azure), internet, consoles
• Tech platforms - gaming platforms, consoles, marketplaces

Moreover, a concentration of competitors who have integrated content, network, distribution channels, and technology platform could stifle competition. This argument should be the heart of the FTC's argument around digital giant dominance and future digital giant dominance. 

Perceived Past History Haunts Microsoft's Argument

Activision has blockbuster titles such as Overwatch, Call of Duty, Diablo, Warcraft, and Candy Crush Saga.  The FTC's argument primarily rests on how Microsoft allegedly failed to keep its word on more open distribution of its titles post acquisition when it acquired Zenimax. The FTC claimed that Bethesda titles Starfeld and Redfall were not available on other platforms. 

Microsoft disputes the terms of the agreement by stating that "“Future decisions on whether to distribute ZeniMax games for other consoles will be made on a case-by-case basis, taking into account player demand and sentiment. Factors that will inform Microsoft’s decision-making on future games include consumer demand and preference and the willingness of third parties to work with Microsoft to launch games for their devices.” 

Despite the apparent confusion and displeasure by the FTC, labor unions such as the Communication Workers of America (CWA) are in favor of the deal.   While Microsoft's gaming head Phil Spencer has offered Activision's blockbuster title Call of Duty, (a $1 billion dollar franchise) for 10 years to both Sony and Nintendo, this may not have been enough for the FTC to back off.

The Bottom Line - Microsoft - Activision Will Become A Landmark Case In Antitrust

Tech companies who thought they could be immune by taking positions on social issues have now realized they are not immune to government interference. At the heart of this case will be how to define the current markets versus the future markets in anti-competitive activity and anti-trust. Dominance in content, network, distribution channels, and tech platforms will eventually become the standard, once this has been identified by the FTC.  For now, this is really about the FTC and Lina Khan needing a win as time is ticking for the current administration to make their point.

In the larger picture, a key factor should be how the innovation lifecycle plays a role in innovation.  Startups and mid-size companies need exits to fund new innovation.  Large digital giants often can not innovate fast enough, attract enough talent, and reach new markets without mergers and acquisitions. Over regulation on M&A will stifle market innovation. Yet, not understanding the dynamics of how digital giants operate in dominating markets will harm consumers in the long run. These factors make this deal a landmark case for the future and may also pave the way for the Metaverse ambitions of Microsoft.