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Twin complaints signal new FTC strategy to rein in tech industry

Lawsuit to block Microsoft’s Activision acquisition and opening arguments in trial over Facebook’s deal to buy Within mark most aggressive actions against Big Tech under Lina Khan

Visitors pass a “Call of Duty” ad at the Gamescom fair in Germany in 2017. (Martin Meissner/AP)

The Federal Trade Commission on Thursday took its most aggressive actions since Lina Khan became chair to rein in the power of Big Tech, pursuing a lawsuit to block Microsoft’s acquisition of a game developer on the same day it opened arguments in another case against Meta’s purchase of a virtual reality start-up.

In both cases, the FTC argued that the acquisitions would squash future innovation in emerging gaming markets, a relatively novel interpretation of antitrust law that Khan (D) and her allies have championed as they seek to usher in an era of competition enforcement. The complaints follow long-running criticism that federal regulators have not been forward-looking enough in evaluating deals in Silicon Valley, allowing tech titans to dominate by gobbling up their much smaller rivals.

The FTC suit against Microsoft would block the company’s $69 billion acquisition of the video game publisher Activision Blizzard, charging that the deal would allow the Redmond, Wash., tech giant to suppress its competitors in gaming. If the FTC’s lawsuit prevails, it would foil Microsoft’s ambitions to become a heavier hitter in the gaming industry. Activision is the owner of popular titles such as “Candy Crush” and “Call of Duty,” and its acquisition could bolster Microsoft in its competition with Japanese console makers Nintendo and Sony.

Shortly after the commission took action in Washington on a 3-1 party-line vote to sue Microsoft, lawyers for the FTC in San Jose argued that Facebook parent company Meta is squashing competition in the niche market of virtual-reality-powered fitness apps by buying the maker of the popular VR workout game “Supernatural.” The case comes as enforcers have signaled during the Biden administration that they plan to more frequently bring long-shot cases against companies to court, even when there’s a risk they could lose.

The joint actions signal that the newly empowered Democrats at the FTC are starting to unleash an agenda that could have far-reaching consequences for the world’s most powerful tech companies, following months of partisan gridlock that blunted Khan’s ambitions.

Microsoft has not seen such a serious regulatory threat to its business in more than two decades, when the Justice Department brought a landmark antitrust lawsuit against the company that ensnared it in years of legal battles.

Meanwhile, Meta is fighting to defend its ability to rely on acquisitions to build out immersive digital worlds, known as the “metaverse.” Meta CEO Mark Zuckerberg has staked the future of the company on those ambitions, changing the company’s name and investing billions of dollars into bringing the metaverse to the masses. Even as the company has suffered revenue declines and slashed 13 percent of its workforce this year in the face of economic uncertainty, Meta has remained steadfast in its VR investment. The company said this year that it expects its virtual and augmented reality division to lose even more money next year.

Trustbusters are bypassing the biggest tech company of them all

Meta and Microsoft have recently had wildly divergent positions in Washington, as Meta was at the center of regulators’ glare while Microsoft largely avoided political scrutiny in the years since the 2002 settlement of its blockbuster U.S. antitrust case. Now both companies find themselves fighting similar battles against the FTC.

Microsoft’s case

Microsoft President Brad Smith signaled that the company would fight the lawsuit, saying in a statement that the company has “been committed since Day One to addressing competition concerns.”

“While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court,” Smith said.

Since declaring its intention to buy Activision in January, Microsoft has announced policies and arrangements intended to show regulators that the deal would not give it an unfair advantage in the gaming market or harm workers. On Tuesday, as it was apparent the agency was nearing a decision on the deal, Microsoft announced that it would bring the Call of Duty franchise to Nintendo Switch, a rival of Xbox. It previously had said it would make those games available on rival Sony’s PlayStation.

The FTC moved to block the deal a day after Microsoft staff met with agency representatives to discuss the lawsuit, according to a person familiar with the meeting, who spoke on the condition of anonymity to discuss a private meeting. Smith said the company offered “proposed concessions” to the agency earlier this week.

Activision makes its popular games available to 154 million monthly active users around the world on a variety of video game consoles, computers, phones and tablets, according to an FTC news release about the complaint. But the FTC alleges that if the deal were to close, that could change. Microsoft would have the ability to thwart competitors by withholding these games from competing game systems entirely, or by manipulating pricing and degrading game quality on rival consoles.

The lawsuit warns that the deal not only could give Microsoft an upper hand in consoles, but also an unfair advantage in more nascent gaming, such as subscription gaming and cloud gaming, according to an FTC official who spoke on the condition of anonymity to discuss the agency’s argument. The FTC argues that this deal could dampen innovation in these more nascent gaming markets, the person said.

“Microsoft has already shown that it can and will withhold content from its gaming rivals,” Holly Vedova, the FTC’s Bureau of Competition director, said in a news release. “Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”

Meta’s battle

Meanwhile, Meta argued in court that Meta-owned Facebook faces significant competition in the small but growing virtual reality market, and it is expecting other big players including Apple and TikTok owner ByteDance to enter in the future.

“Meta domination — not a serious argument, Your Honor,” Meta lawyer Mark Hansen said.

But the FTC argued in the Northern District of California court that Meta had considered creating its own VR fitness app but instead decided to buy the virtual reality studio Within — thereby depriving consumers of vibrant choices in the market.

“Meta could have chosen to use all its vast resources and capabilities to build its own VR-dedicated fitness app,” FTC lawyer Abby Dennis said. Instead, the company decided to acquire market leader Supernatural, she added.

Hansen argued the company’s idea to build a VR fitness app had been dismissed.

Meanwhile, advocates for antitrust enforcement cheered on the FTC’s strategy of pursuing cases against such mergers — even risky ones. Lee Hepner, the legal counsel at the American Economic Liberties Project, said the FTC’s case against Microsoft was a signal of a “renewed approach” under the Biden administration to restore competition.

“What has happened over the past 50 years, really, is through a pattern of intentional government neglect, caused by intensive corporate lobbying, we’ve abandoned the purpose of the law,” he said. “So I think what we’re seeing now is not the FTC and DOJ trying to rewrite the law. It’s trying to reinvigorate the law and to restore the law to its intent.”

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