It would be the biggest merger in the history of video games—by a large margin. But does Microsoft have anything to fear from antitrust regulators as it seeks to buy Call of Duty publisher Activision Blizzard for $68.7 billion?
The deal, in which scandal-ridden Activision Blizzard CEO Bobby Kotick will likely score a $375 million windfall, is certainly taking place at a time when Big Tech is under greater antitrust scrutiny than ever before, and when competition authorities are flexing their muscles to demonstrate a loss of patience with the sector.
That’s seemingly spooking investors. Activision shares, as of midday Wednesday, were trading at $82, far below the $95 cash offer Microsoft announced Tuesday.
The purchase would make Microsoft the third-biggest games publisher in the world and would tie into the companies’ efforts to build a strong position in the development of the “metaverse.” Microsoft sees this as crucial to the concept of spending time in a virtual world. “Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms,” Microsoft CEO Satya Nadella said.
But whether it’s virtual reality or content concerns that might stir regulators, it’s far from clear that there’s a strong reason to block the merger on those grounds.
Out of sight
In the U.S., the Federal Trade Commission and Justice Department have begun rewriting merger rules to better handle the impact of Big Tech acquisitions on things like innovation and data exploitation. The FTC is also trying to break up Facebook parent Meta with a lawsuit that a court just allowed to go ahead. (The agency wasn’t so lucky the first time it filed the suit.)
Over in Europe, a new law called the Digital Markets Act is wending its way through the EU’s legislative process, targeting “gatekeeper” platforms that businesses and consumers struggle to avoid—the idea is to stop these tech giants from shutting out competitors. Germany has already pushed ahead on this front, giving its competition authority power to step in early when a large tech firm might abuse its position. The U.K.’s antitrust regulator has already ordered Meta/Facebook to unwind its Giphy acquisition, while Italy’s watchdog last month fined Amazon $1.2 billion over antitrust abuses.
However, this multipronged assault on Big Tech has thus far tended to focus on Meta/Facebook, Google, Amazon, and to a lesser extent Apple. These are the companies that mediate the information we receive online and that are most likely to suck up our data. Microsoft may once have been antitrust regulators’ primary target, and it does still get the occasional probe, but these days it’s more likely to be trying to sic competition watchdogs on its rivals than it is to be the subject of their investigations.
Germany’s competition regulator, for example, decided this month that Alphabet/Google has “paramount significance across markets” and is therefore subject to what it calls extended abuse control. It is also evaluating whether to do the same for Meta/Facebook, Amazon, and Apple. It hasn’t gotten around to Microsoft yet with its hands already full.
Will Microsoft attract serious scrutiny this time round? It depends on whether regulators think the merger could cause serious problems—and if the green lights given by U.S. and EU watchdogs to Microsoft’s purchase of gamemaker ZeniMax Media last year are anything to go by, they may not have such fears.
Addressing the antitrust question in a GamesBeat interview, Kotick said Microsoft would “drive the bus” on such issues, but argued that “there’s more competition than we’ve ever seen for games.” Both companies have stressed that mobile gaming is where most of the action is these days, and Microsoft does not currently have a particularly strong position in this arena.
(Should the deal fall through, termination fees were laid out in an Activision 8-K filing with the SEC Wednesday. Microsoft would pay Activision $2 billion if things are scuttled before Jan. 18, 2023; $2.5 billion if that occurs between Jan. 18 and April 18; and $3 billion anytime after April 18, 2023. Activision, meanwhile, would owe Microsoft $2.27 billion if it accepts a better offer.)
As for the pivotal question of whether Microsoft will continue to allow Activision’s games to appear on rival platforms—the merger news lopped an eighth off the share price of PlayStation maker Sony—Kotick said Microsoft had “given us repeated assurances that our content will be available on as many devices as possible.”
That said, Microsoft absorbed Skyrim maker Bethesda as part of the ZeniMax deal last year, and the studio’s upcoming Starfield game will be exclusive to Microsoft’s Xbox platform and PCs, where Microsoft’s Windows operating system dominates. Elevation’s Betty Chan said in a Tuesday note that regulators will “undoubtedly” home in on the potential for the Activision takeover to result in similar restrictions.
And then there’s the deal’s “metaverse” aspect to consider. Since the announcement, Kotick has repeatedly said that Microsoft has the “resources and talent” that Activision needs to fully engage in this burgeoning market, where Meta/Facebook is already leading, having invested billions of dollars.
Margrethe Vestager, the EU’s competition chief, told Politico in an interview this week that the metaverse was very much on her radar, as it will “present new markets” such as those for the trading of virtual goods. However, the metaverse has yet to materialize, so new regulations for controlling it are some way off.
Some consumer advocates are already on the case. “Once again, Microsoft, one of the biggest of the Big Tech companies, is shamelessly gobbling up a competitor to try to strengthen its market position,” thundered Alex Harman of the NGO Public Citizen in a Tuesday statement. “No way should the Federal Trade Commission and the U.S. Department of Justice permit this merger to proceed. If Microsoft wants to bet on the ‘metaverse,’ it should invest in new technology, not swallow up a competitor.”
Tell that to UBS analysts Karl Keirstead, Taylor McGinnis, and Seth Gilbert, who wrote in a Wednesday note that the strategic fit between the companies was “very strong” and that “this was primarily a content aggregation move, not some metaverse play.” Indeed, if the deal does run into regulatory headwinds, it’s far more likely that content will be the key.
Fortune’s upcoming Brainstorm Design conference is going to dive into how businesses are building experiences in the metaverse. Apply to attend the event on May 23-24 in New York.