In baseball, it’s three strikes and you’re out. By that standard, antitrust enforcers at the Federal Trade Commission should have stepped off the playing field a while ago.
In tallying up the losses, it’s hard to know where to start. Their regulatory parade of follies includes the agency’s debatable effort to block Altria’s minority equity investment in Juul, a struggling e-cigarette maker; its puzzling suit to block Facebook’s acquisition of Within; a fitness app in the embryonic metaverse market for health-care apps; and now a newly rejected challenge to the Microsoft-Activision combination in the video-game market.
Although the FTC succeeded in disrupting Illumina’s acquisition of Grail, a cancer-diagnostic startup, that is only because the agency effectively outsourced enforcement to EU regulators (which asserted jurisdiction and blocked the acquisition, even though Grail does no business in Europe). The FTC subsequently lost its case against Illumina in its own administrative court — a ruling which the commissioners then simply overruled.
In rejecting the vertical merger guidelines that the FTC and Department of Justice had jointly issued in 2020, current FTC leadership advanced the view that federal case law applies overly demanding standards, overlooking the competitive risks allegedly posed by vertical acquisitions. Yet regulators have a duty to enforce the law as it exists today, not as regulators would like to rewrite it. That is a fundamental basis for the rule of law.
Having lost the fight to reinterpret the antitrust laws in court or to amend those laws in Congress, FTC leadership adopted an “in terrorem” intimidation strategy of bringing causes of action against vertical acquisitions even when lacking a credible legal or factual basis.
These litigation theatrics impose an antitrust tax that can lead targeted firms to pull a transaction — securing outcomes that the agency likely could not achieve in a fully adjudicated proceeding. In some acquisitions, the prospect of litigation will cause parties to withdraw while other transactions that may have benefited consumers are probably not being undertaken given the unpredictable regulatory climate.
Legal uncertainty is now heightened in the case of vertical acquisitions since the FTC has not provided guidance to replace the vertical merger guidelines withdrawn in 2021, leaving the agency with regulatory discretion that has few known limits.
Concerns over the absence of regulatory guardrails are illustrated by the agency’s challenge to the Microsoft-Activision acquisition. The weakness of the case is notable in two key respects, which explains why Japan’s competition regulator approved the transaction in March 2023 and EU competition enforcers — who are hardly reluctant to intervene — did so in May 2023.
First, concerns that Microsoft could foreclose the current leaders (Sony and Nintendo) in the console-based segment of the video-game market from offering the popular Call of Duty video game are mitigated by Microsoft’s disinclination to forfeit the licensing revenues that would be sacrificed by doing so or to risk discouraging usage by degrading the game’s cross-platform functionality.
Moreover, in anticipation of the closing of the acquisition, Microsoft has already entered into a 10-year licensing agreement with Nintendo (which currently does not even offer Call of Duty) and has made a commitment to maintain Sony’s access to the game for the same period. Given those commitments, the FTC’s foreclosure concerns therefore assume implausibly that Microsoft’s well-resourced competitors will somehow be precluded during that 10-year period from having the opportunity to develop or acquire games that challenge the Call of Duty franchise.
Second, the FTC’s challenge overlooks the fact that the Microsoft-Activision combination can improve competitive conditions in the video-game market by promoting development of a cloud-based streaming segment that challenges current leaders in the console-based segment. This is a challenging undertaking that only the largest firms can feasibly attempt: even Google was compelled to close its Stadia cloud-gaming service due to meager adoption.
Turning antitrust law on its head, the FTC’s challenge impedes the emergence of a new delivery model that could pose a competitive threat to leading console-based services. Moreover, to allay foreclosure concerns raised by EU regulators, Microsoft agreed to license Activision content to other cloud-based streaming services.
FTC leadership has made the broader case that antitrust enforcement has been constrained by an analytical framework that requires compelling factual evidence of competitive harm in the case of most alleged offenses. Taking antitrust law several decades backwards, agency leadership seeks to revert to the discredited formalism of post-World War II antitrust policy, which reflexively assumed competitive harm based largely on market share or certain types of business practices.
The Microsoft-Activision case illustrates the counterproductive outcomes to which this categorical approach can lead. The fact that Microsoft is a “mega”-sized firm, or that it wishes to expand vertically into the content segment of the video-game market, cannot condemn the transaction without persuasive evidence that it would “substantially lessen” competition. By adopting a “big is bad” approach to merger review that overlooks a well-developed economic literature rejecting inferences of competitive harm based merely on firm size or a certain type of business practice, the FTC has brought a case that threatens to entrench incumbents, suppress innovation and harm consumers.
The populist narrative that now prevails in antitrust discussion among policymakers and the press sometimes asserts that courts and agencies integrated economic principles into antitrust law based on a nefarious campaign to protect “big business.” This historical fable can have adverse consequences for real-world markets.
The integration of economic concepts into antitrust case law and agency guidelines reflected careful efforts by scholars to develop an evidence-based framework for enforcing antitrust law in a manner that protects competition rather than particular competitors — and certainly not incumbents that gain when regulators impede development of a rival innovative product.
Ironically, the FTC’s weak case against the Microsoft-Activision transaction provides the best evidence for the wisdom of this approach.
Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the University of Southern California, Gould School of Law and the author of “Innovators, Firms, and Markets: The Organizational Logic of Intellectual Property.”
