The first call Microsoft CEO Satya Nadella made in early 2022 after his company announced a $69 billion deal to buy video game publisher Activision Blizzard was to Sony CEO Kenichiro Yoshida.
Activision created the hit video game Call of Duty and Sony created the PlayStation gaming console, which competed with Microsoft’s Xbox. Nadella knew that Sony would be concerned that Microsoft might pull Activision games from PlayStation.
“I just wanted to make it very, very clear to Yoshida-san, someone with whom I have a fantastic relationship, that there should be no ambiguity in our support of the Sony platform in the future,” Mr. Nadella would later testify in court. .
The call was a linchpin of Microsoft’s legal strategy to overcome immense government scrutiny of the biggest consumer technology deal in decades. To close the deal, Microsoft needed to appease three of the world’s most powerful and skeptical regulators: the U.S. Federal Trade Commission, the European Commission in Brussels and Britain’s Competition and Markets Authority.
Little by little, Microsoft turned its competitors into allies, signing private agreements to forestall the concerns it anticipated from regulators. When diplomacy didn’t work, he made a substantial concession and used extensive legal resources to crush government agencies.
The strategy worked. European regulators turned private agreements with rivals into a formal agreement. A U.S. judge repeatedly cited those side agreements to allow the acquisition to proceed despite the FTC’s objections. And after initially opposing the deal, the British regulator reopened talks with Microsoft after the company made concessions to limit its control over game streaming, gaining formal approval on Friday. That same day, nearly 21 months after it was initially announced to the public, Microsoft closed the deal.
A Microsoft executive said the deal’s closing marked a “good day for gaming” and Activision’s CEO called it a “milestone” for the company. A spokeswoman for the Federal Trade Commission, Victoria Graham, said the agency would continue to challenge the deal even though it has already closed. Sony declined to comment.
Microsoft relied on an extensive legal and lobbying operation developed after its long antitrust battle in the 1990s. Under Brad Smith, the company’s president and de facto head of government relations, Microsoft has built deep relationships in Washington and has presented as a responsible corporate citizen who has shed his bellicose reputation.
It hasn’t gone perfectly as planned. Microsoft’s charm offensive failed to convince Lina Khan, the chairwoman of the FTC, who has led the commission to take a tougher stance toward the power of the biggest tech companies. The agency challenged the deal in an administrative court and then asked a federal court to stop its closure, but ultimately failed. The FTC appealed the federal court ruling.
Several senators too asked the FTC to examine the acquisition’s impact on workers, an issue that Ms. Khan had taken interest Microsoft negotiated a deal to remain neutral in a unionization drive by the Communications Workers of America, which initially opposed the deal.
The union began defending Microsoft, appealing directly to Ms. Khan, but its focus on consumer issues prevailed. The neutrality agreement remains, although the political benefit has vanished.
And for more than half a year, Microsoft tried to court Sony, with talks on and off until late August, when the head of Microsoft’s gaming division, Phil Spencer, emailed a Sony executive, Jim Ryan, with a list of games that Microsoft would guarantee could remain on PlayStation.
“It wasn’t a significant list,” Mr. Ryan later testified, explaining that “for example, Overwatch “It’s there, but Overwatch 2 is not there, the current version of the game.”
Just as regulators moved into more intense review phases, any hope of a partnership with Sony faded. So Microsoft turned to the other big console maker, Nintendo, whose immensely popular Switch device competes with the Xbox and PlayStation.
Xbox executive Sarah Bond testified that she had initially sent an email to the president of Nintendo’s North American division, Doug Bowser, hours after the deal was announced. But it wasn’t until December that Microsoft announced a deal to bring Call of Duty to the Nintendo Switch. The FTC was not swayed and soon filed a lawsuit to block the deal in its administrative court.
The FTC lawsuit pushed Microsoft to sign contracts that cemented its informal promises to rivals, Ms. Bond testified. “We wanted to make it absolutely clear that we would do it and we wanted to make a legally binding commitment to prove it,” she said.
Microsoft announced several of those deals with game streaming partners at a press conference in Brussels. In May, the European Union approved the acquisition, on the condition that Microsoft maintain those streaming agreements. But the British regulator still moved to block the deal in late April, saying it was concerned that Microsoft would dominate the nascent game streaming industry. To many, it looked like the deal could fail.
Microsoft has resorted to a tactic increasingly popular among corporate lawyers trying to defeat regulators. When trying to get mergers approved, companies often promise regulators that they will not engage in certain anticompetitive conduct, or offer to spin off parts of their operations. Regulators increasingly reject such promises as inadequate and instead challenge mergers in court.
But the companies have managed to defeat those court challenges, effectively getting a judge to agree that their promises to regulators should have been enough. In antitrust circles, the tactic is known as “litigating the solution.” Microsoft had its solution: the contracts it had reached with its rivals promised access to Call of Duty.
But he needed to appear before a judge.
The FTC’s lawsuit in its domestic court was scheduled for August 8. But Microsoft was confident it could win if it brought its case directly before a federal judge, something that would pressure the FTC to drop its entire domestic court challenge. The deadline to close the deal is mid-July.
In early June, the FTC sent an email to Microsoft, asking if the company would commit to not closing the deal until it resolved the problems in Britain, according to a person familiar with the correspondence. Microsoft said it couldn’t promise that. The FTC quickly sued Microsoft in federal court, saying that a court order preventing the deal from closing was “necessary because Microsoft and Activision have stated that they can consummate the proposed acquisition at any time.”
Ten days later, Microsoft got the federal trial it wanted.
The FTC argued during a federal hearing in June that the agreements Microsoft had signed were confusing and rushed, and that the judge should not factor them into his consideration.
But Microsoft’s bet worked.
The judge, Jacqueline Scott Corley, ruled in favor of Microsoft, saying she was persuaded in part by the company’s offering of Call of Duty to other platforms. In her decision, she wrote that Microsoft “will likely have no incentive to violate these agreements.”
Judge Corley also noted that Microsoft’s strategy had resulted in concessions that would benefit consumers.
“That scrutiny has borne fruit: Microsoft has committed in writing, in public and in court to keeping Call of Duty on PlayStation for 10 years on par with Xbox,” Judge Corley wrote. “He made an agreement with Nintendo to bring Call of Duty to change. And it signed several agreements to bring Activision content to various cloud gaming services for the first time.”
In an unusual move, the British regulator then said it was reconsidering its opposition because Microsoft appeared willing to make new concessions. Microsoft formally unveiled a new plan: It would transfer the streaming rights to license all current and future Activision games to Ubisoft Entertainment, a rival game publisher.
The agreement, which would last 15 years everywhere outside the European Union, means that Microsoft would not have the power to unilaterally make Activision games available exclusively on its own streaming service.
Nearly two months after reviewing the revised plan, the British regulator gave Microsoft its final blessing. The company closed the deal hours later.
