Case 3:23-cv-02880-JSC Document 177 Filed 06/22/23 Page 1 of 77

1 Beth Wilkinson (pro hac vice)
Rakesh N. Kilaru (pro hac vice)
2 Kieran Gostin (pro hac vice)James Rosenthal (pro hac vice)
3 Grace Hill (pro hac vice)
Anastasia M. Pastan (pro hac vice)
4 Jenna Pavelec (pro hac vice)
WILKINSON STEKLOFF LLP
5 2001 M Street, N.W., 10th Floor
Washington, D.C. 20036
6 Telephone: (202) 847-4000
Facsimile: (202) 847-4005f
7 bwilkinson@wilkinsonstekloff.com
rkilaru@wilkinsonstekloff.com
8 kgostin@wilkinsonstekloff.com
jrosenthal@wilkinsonstekloff.com
9 ghill@wilkinsonstekloff.com
apastan@wilkinsonstekloff.com
10 jpavelec@wilkinsonstekloff.com
11 Bambo Obaro
WEIL, GOTSHAL & MANGES LLP
12 201 Redwood Shores Parkway
Redwood Shores, CA 94065
13 Telephone: (650) 802-3083
Facsimile: (650) 802-3100
14 bambo.obaro@weil.com
15 Counsel for Microsoft Corp.
16 [Additional Counsel Identified on Signature Page]
UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF CALIFORNIASAN FRANCISCO DIVISION

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FEDERAL TRADE COMMISSION
Plaintiff,

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v.

Case No. 3:23-cv-02880-JSC
DEFENDANTS’ PROPOSEDPRETRIAL FINDINGS OF FACTAND CONCLUSIONS OF LAW

MICROSOFT CORP. and
ACTIVISION BLIZZARD, INC.,
Defendants.

Hon. Jacqueline Scott Corley
Date: June 22, 2023
Time: 8:30 a.m.
Courtroom: 8 – 19th Floor

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1

TABLE OF CONTENTS

2 INTRODUCTION ...........................................................................................................................1
3 PROPOSED FINDINGS OF FACT ................................................................................................1
4

I. .......... The Merging Parties and the Proposed Transaction. ...............................................1

5

II. ........ The Gaming Industry Is Dynamic and Highly Competitive. ...................................36

A. ........ Gamers today can choose from more games than ever before. ...................47

B. ........ Gamers can play on many different platforms. ............................................58

C. ........ Gamers can access games through various payment anddistribution models.......................................................................................89
10III. ....... Xbox and Activision Both Face Intense Competition. ..........................................12

11

A. ........ Xbox has lost the console wars, and its rivals are positioned tocontinue to dominate, including by leveraging exclusive content. ............12

12

B. ........ Activision’s content faces intense and growing competition. ...................16

13

C. ........ Xbox has a negligible presence in mobile, the fastest growing
gaming segment. ........................................................................................22

14
15

IV. ....... The Transaction Will Provide Xbox with a Position in Mobile and Expand
Choice for Gamers and Developers. ......................................................................23

16

A. ........ Xbox’s primary rationale for the deal is to improve its mobile
presence......................................................................................................23

17
18

B. ........ The transaction will give gamers more choices than would beavailable absent the deal. ...........................................................................24

19

V. ........ Numerous Foreign Antitrust Authorities Have Approved the Transaction. ..........34

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25
26

VII. ..... Dr. Carlton Demonstrates that the Transaction Would Produce Significant
Pro-Competitive Benefits.......................................................................................37

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1 PROPOSED CONCLUSIONS OF LAW ......................................................................................382

I. .......... Legal Standard .......................................................................................................38

3

A. ........ Section 7 of the Clayton Act ......................................................................38

4

B. ........ Preliminary Injunction Standard ................................................................40

5

II. ........ The FTC Has Failed to Show That It Is Likely to Succeed on the Merits. ............41

6

A. ........ The FTC Has Failed to Identify a Proper Relevant Antitrust
Market. .......................................................................................................417
8

B. ........ The FTC Has Failed to Show that the Proposed Merger Is
Substantially Likely to Lessen Competition. .............................................51

9

III. ....... The Equities Weigh Against a Preliminary Injunction. .........................................71

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1

INTRODUCTION
The Federal Trade Commission (“FTC” or the “Commission”) has failed to demonstrate

2

3 that it is likely to show that the proposed merger between Microsoft Corporation (“Microsoft”)
4 and Activision Blizzard, Inc. (“Activision”) is likely to substantially lessen competition. 15
5 U.S.C. § 18. Further, the balance of the equities and the public and private interests weigh
6 against preliminarily enjoining the merger. Accordingly, the FTC’s Motion for a Preliminary
7 Injunction is DENIED.
PROPOSED FINDINGS OF FACT89 I.

The Merging Parties and the Proposed Transaction.

101.

Microsoft is a publicly traded corporation organized under Washington law and

11 headquartered in Redmond, Washington.
122.

Microsoft manufactures dedicated gaming consoles, including the Xbox Series X

13 and S, and distributes video games via the Xbox Store and Microsoft Store.
143.

Microsoft also develops and publishes games for play on personal computers

15 (“PCs”), mobile devices, and its Xbox consoles, as well as for play on third-party consoles,
16 including the Sony PlayStation and Nintendo Switch.
174.

Microsoft offers a multi-game subscription service, called “Game Pass,” that18 provides subscribers with access to a library of more than 500 games for a single monthly fee.
19 The Game Pass Ultimate tier includes features like Xbox Cloud Gaming, which allows users to
20 stream certain console games available on Game Pass through the cloud, instead of downloading
21 native versions of the games.
22

5.

Activision is a publicly traded corporation organized under Delaware law and

23 headquartered in Santa Monica, California.
24

6.

Activision is a global developer and publisher of video games that are available

25 on dedicated gaming consoles, PCs, and mobile devices, and is comprised of three business
26 units, each of which develops and publishes video game content: Activision Publishing, Inc.
27 (“AP”), Blizzard Entertainment, Inc. (“Blizzard”), and King Digital Entertainment (“King”).
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1

7.

Activision also owns and operates a PC gaming platform, Battle.net, which serves

2 as a distribution outlet and social platform for Activision’s PC titles.
3

8.

On January 18, 2022, Microsoft announced an agreement to acquire Activision

4 for $68.7 billion. That agreement provides, among other things, that either party may terminate
5 the merger agreement if the transaction has not closed by July 18, 2023. If the agreement is
6 terminated, Microsoft is obligated to pay Activision a termination fee of $3 billion.
7

9.

The planned merger was reported to the FTC, as required under the Hart-Scott-8 Rodino Antitrust Improvements Act (“HSR Act”), on February 1, 2022. The FTC thereafter
9 commenced an 11-month investigation, requiring Defendants to produce nearly 3 million
10 documents and sit for 15 investigational hearings. The waiting period under the HSR Act that
11 prevents the parties from closing the transaction was extended by agreement with the FTC until
12 November 21, 2022, and the parties thereafter agreed voluntarily to delay closing until December
13 12, 2022.
14

10.

On December 8, 2022, the FTC filed an administrative complaint against the

15 merger, alleging that it violates Section 7 of the Clayton Act, 15 U.S.C. § 18, and Section 5 of
16 the FTC Act, 15 U.S.C. § 45. Defendants produced an additional nearly 1 million documents and17 sate for more than 30 depositions during discovery in the administrative proceeding.
18

11.

The FTC alleges that Xbox will withhold access to Activision games in four

19 “markets”: high-performance consoles, multi-game content library subscription services, cloud
20 gaming subscription services, and a combined multi-game and cloud gaming subscription
21 services market. The FTC defines the high-performance console market to include only Xbox
22 and Sony PlayStation. The FTC defines the geographic market as the U.S. The FTC claims that23 withholding Activision content will result in foreclosure that “is reasonably likely to
24 substantially lessen competition in the Relevant Markets.” The FTC makes no allegations of
25 harm to competition in any game publishing or distribution market, or any market involving
26 mobile gaming.
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1

12.

In its administrative complaint, the FTC scheduled a hearing on the complaint for

2 August 2, 2023—a date eight months in the future that is plainly after the July 18th merger
3 termination date—despite the fact that the FTC is permitted under its rules to set an earlier date
4 and usually does so in unconsummated mergers. Indeed, the FTC also did not follow its standard
5 practice of filing, at the same time as its administrative complaint, a preliminary injunction
6 action in federal court pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b).
713.

On June 12, 2023, six weeks before the merger agreement could be terminated,

8 the FTC filed this action, seeking a temporary restraining order and preliminary injunction
9 barring the acquisition pending a trial before a hearing, decision, and appeal of the FTC’s
10 administrative complaint.
11

14.

If the Court grants a preliminary injunction that prevents the transaction from12 closing, that could derail the deal entirely.
13

15.

The FTC administrative process ordinarily takes years to resolve. As just one

14 example, in the most recent administrative challenge to a merger (In the Matter of Illumina, Inc.,
15 and Grail, Inc., 201 F.T.C. 0144 (2023)), it took over 19 months from the time of the
16 administrative trial (August 24, 2021) to when the Commission issued its opinion (April 3,
17 2023). The matter is now on a “fast-track” appeal (timing the FTC opposed) before the 5th
18 Circuit, but the case has yet to be argued. If the same timing holds in this case, even if the
19 administrative proceeding begins on August 2, 2023 as scheduled, it would still likely not be
20 resolved before 2026.
21 II.

The Gaming Industry Is Dynamic and Highly Competitive.

22

16.

Gaming is a highly dynamic and competitive industry, and the fastest growing

23 portion of the media and entertainment sector. Gaming is larger in revenue than TV, home video
24 (including streaming), cinema, music, books or newspapers, and magazines.
25

17.

There are 3 billion gamers around the world. Over half of the world’s current

26 gamers are in Asia, and gaming is growing most quickly in developing countries like India and
27 Mexico (in large part due to increased accessibility to free games on mobile phones). By 2030,
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1 roughly half of the global population (4.5 billion) is expected to participate in the gaming
2 industry.
3

18.

Gaming generates hundreds of billions of dollars of revenue a year and is

4 projected to grow substantially in the future. Gaming grew to record high levels during the global
5 pandemic, with people seeking at-home entertainment options more than ever before.
6

19.

The gaming sector is highly fragmented, and includes traditional participants

7 (e.g., Sony, Nintendo, Tencent, Valve), new entrants (e.g., Amazon, Mediatonic, Moon Studios,
8 Purple Lamp, Hello Games) and new services (e.g., the gaming offerings of Amazon, Apple,
9 Google, Netflix, and Nvidia).
1020.

Microsoft and Activision are just two companies in the highly competitive and

11 diverse gaming industry. Microsoft is the number three console manufacturer, behind Sony and
12 Nintendo. Likewise, Activision is just one of dozens of game publishers.
13

A.

Gamers today can choose from more games than ever before.

14

21.

Given the dynamism of the market, the number of games released each year has

15 been increasing, offering a greater variety of choice to gamers. The Entertainment Software
16 Association estimates that there were more than 1,600 game developers in the U.S. alone in
17 2019.
18

22.

In 2021, there were around 1,700 unique titles launched on Nintendo Switch, over

19 980 on Sony PlayStation and around 725 on Xbox.
20

23.

Microsoft estimates that gamers play overdifferent games on Microsoft’s

21 gaming platform each week.
22

24.

Certain game franchises release new titles every year, including (among others)

23 Activision’s Call of Duty (“COD”), Electronic Art’s (“EA’s”) FIFA, and Ubisoft’s Assassin’s
24 Creed. Many games, like Grand Theft Auto, regularly update their content (for example, offering
25 new maps or quests for gamers to complete), while releasing new titles every few years.
26

25.

Studios both large and small develop popular games. Many popular games were

27 unexpected breakout successes developed by small independent studios. For example, Among Us
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1 was developed by a studio with only four employees, yet quickly attracted record numbers of
2 monthly players and generated over $86 million in revenue. Many other successful games such
3 as Fall Guys, Player Unknown: Battlegrounds, and Rocket League were launched by small
4 independent studios with relatively small development and marketing budgets.
5

26.

The console makers also produce hit games. One of the most acclaimed games of

6 2022 was Sony’s God of War: Ragnarok. Similarly, Naughty Dog, a subsidiary of Sony,
7 published the PlayStation exclusive The Last of Us, one of the best-selling games of all time.
8 That game and its sequel has only ever been available on PlayStation and has been converted
9 into a critically acclaimed HBO series.
1027.

Although major gaming companies invest millions of dollars trying to create the

11 next big hit, investment and reputation does not always guarantee success. Every year, there are
12 highly anticipated and well-funded games that are unsuccessful. For example, Xbox’s Halo
13 Infinite (released in 2021) and Activision’s Call of Duty: Vanguard (released in 2019) were both
14 widely regarded as critical and financial flops despite high expectations, large budgets, and
15 affiliations with popular franchises. More recently, the much-anticipated Xbox and PC-exclusive
16 Redfall was panned by critics and gamers upon release.
1728.

For any platform to be successful, it is important that it offer gamers a variety of

18 games. No single game drives platform success.
19

B.

1.

20
21

Gamers can play on many different platforms.

29.

The leading gaming platforms are mobile, PC, and console.

Games are available to play across a wide range of platforms, including mobile,

22 PC, and console.
2330.

Over the past few decades, the gaming industry has changed dramatically.

24 Gamers used to play video games primarily in arcades. In later years, they purchased individual
25 game cartridges or discs to play on consoles in their homes. Now, gamers can download games
26 directly to their consoles, and play games on PC and mobile devices.
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1

31.

The three major gaming consoles today are Sony PlayStation, Nintendo Switch,

2 and Microsoft Xbox. While consoles used to be the predominant form of home gaming, they
3 now represent a smaller share of video game revenue than mobile and PC.
432.

Most gamers today play on mobile devices, which is also the fastest growing

5 segment as the technical capabilities of mobile devices increase. Gamers spend far more hours
6 gaming on Android and Apple iOS mobile devices than on any other platform. The technical
7 capabilities of mobile devices are increasing.
8

33.

After mobile, PC gaming is the next largest source of video game revenue.

9 PlayStation’s CEO, Jim Ryan, referred to PC gaming as “
10
2.

11
12

34.

Gamers can play the same games on different platforms.

Many of the most-played games are available on multiple platforms (including

13 different consoles, PC, and mobile). For example, platform access to the Minecraft franchise has
14 expanded to over twenty devices across these three types of platforms.
15

35.

Nearly all of the best-selling games for Xbox and PlayStation are also sold for

16 PC. In 2022, for example, all but one of the top 30 Xbox titles and all butof the top 30

17 PlayStation titles were available on PC.
1836.

Gamers can now play certain multiplayer games across platforms. For example, a

19 gamer on PlayStation can now play many games with other gamers playing on another platform,
20 like Xbox or PC. That mode of play is referred to as “cross-platform” gaming or “cross-play.”21

37.

In most multiplayer games, a gamer selects multiplayer game mode, the game22 matches the gamer with other gamers, and the gamers are then placed in a lobby and either enter
23 the game or are placed in teams. Before the advent of cross-play, gamers could play multiplayer
24 games only with other gamers using the same platform (e.g., a PlayStation console). In 2018,25 Epic Games enabled cross-play functionality in its hugely popular Fortnite game, allowing
26 gamers from different platforms, including PlayStation, Xbox, Nintendo, and PC, to play against
27 each other simultaneously.
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38.

Cross-play leads to material and measurable improvements in the quality of

2 gamers’ user experience. Because games with cross-play increase the number of gamers
3 available to partner with, cross-play enhances the value of a game, including by more effectively
4 and quickly matching comparably skilled gamers. In addition, cross-play makes games more
5 valuable to consumers because they can play the game with friends and access larger lobbies of
6 players.
7

39.

Many of the most popular multiplayer titles (e.g., Fortnite, PUBG, Call of Duty,

8 and Minecraft) allow gamers to cross-play between at least PC and console.
940.

A significant appeal of Call of Duty is that it has a multi-player mode often played

10 by groups across different platforms, including PlayStation.
11

41.

Activision introduced a cross-play feature to Call of Duty in 2019, with the Call

12 of Duty: Modern Warfare title, and that feature has existed in every subsequent annual Call of
13 Duty title. It also exists in the free-to-play Call of Duty: Warzone. The introduction of cross-play
14 to Call of Duty has significantly improved players’ experience; the game’s online multiplayer
15 functionality thrives on a large and active player base, and cross-play has increased the number
16 of available players. With a larger pool of available players, matches can be more evenly
17 populated in terms of skill level, resulting in quicker and more competitive matchmaking, and18 ultimately improving players’ gaming experience.
19

42.

The introduction of cross-play and its significance to Call of Duty gamers

20 prompted Activision to eliminate any material differences between gameplay on Xbox and
21 PlayStation. Before cross-play became popular on Call of Duty, Activision had offered or
22 contemplated offering certain feature and content
23
24. However,25
26. Thus,27 while Activision’s
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1
2
3

.
43.

Removing Call of Duty from PlayStation would dramatically shrink the

4 community of potential gamers, making the gaming experience worse for anyone remaining.
5C.

Gamers can access games through various payment and distribution models.

6

44.

Gamers are able to access games through a growing variety of payment and7 distribution models. The diversity of payment and distribution models has increased the
8 accessibility of games and expanded gamer choice.
1.

9
10

45.

Buy-to-play and free-to-play models.

Most gamers obtain entitlements to access and play console games via the “buy-11 to-play” model of purchasing the games in the form of a cartridge, DVD or Blu-Ray disc, or
12 digital download for an upfront price (e.g., $70) and adding them to their own libraries.
13

46.

As mobile gaming has grown more popular, the “free-to-play,” or “F2P,” model

14 has grown with it. With F2P, games are downloaded for free but are then monetized through in15 game purchases or in-game advertising. The free-to-play model is now found on PC and console
16 as well.
17

47.

Free-to-play is the fastest growing business model in the industry today, and there

18 are thousands of free-to-play games available, particularly on mobile. Free-to-play games like
19 Fortnite, League of Legends, and Apex Legends (among many others) have become some of the
20 most popular games in the industry, and generate substantial revenues even though the initial
21 entitlement is free.
22

48.

Free-to-play games have allowed small independent companies to grow quickly.

23 For example, Epic Games’ valuation has increased from $1 billion in 2012 to over $30 billion in
24 2022, powered by the 2017 launch of its flagship free-to-play game, Fortnite.
2.

25
26

49.

Subscription models.

Subscription models are an example of innovation in game payment. With multi-

27 game subscription offerings, gamers pay a flat monthly fee to access a library of games. In the28-8-

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1 case of most subscription offerings, subscribers download the games they want to play to their
2 devices, and then play them using those devices. With some services, gamers can stream games
3 while waiting for the game to download, or try out a game before downloading.
450.

Sony and Xbox offer their users the option of accessing games through5 subscriptions.
651.

In 2017, Xbox launched Game Pass, one of the first multi-game subscription

7 offerings. The value proposition behind Game Pass was relatively straightforward: subscribers
8 could access a broad catalog of games for a set monthly fee instead of purchasing the games
9 outright. To make Game Pass more attractive, Xbox includes all games developed by its studios
10 (known as “first-party games”) in Game Pass the day of release (“day-and-date”).
11

52.

Small and independent game developers, in particular, benefit from this model

12 because it gives their products wider exposure than would occur in a digital store, since gamers
13 who may not otherwise discover or try out games from lesser-known creators are more likely to
14 do so when the games are included in a set fee. Game Pass has thus been credited with15 contributing to the breakout success of games from various indie studios, like High on Life and
16 Atomic Heart.
17
18
19
20

54.

Other subscription services offer access to only a single game. Still others are

21 limited to the games of a single publisher, like EA’s subscription service, EA Play, which offers
22 a rotating multi-game catalog of EA games and features limited trials of new games to help
23 promote new releases.
24

55.

There is considerable variation among subscription offerings. Although Xbox

25 simultaneously offers most of its first-party games as buy-to-play and on its Game Pass
26 subscription offering, Sony does not. Even though Sony releases some of the most popular first27 party games each year, Sony has affirmatively decided not to add any of its new first-party
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1 content to subscription service day-and-date. Last year when Sony revamped its subscription
2 offering under the PlayStation Plus banner, PlayStation CEO Jim Ryan publicly stated, “This is
3 not a road that we’ve gone down in the past, and it’s not a road that we’re going to go down with
4 this [PlayStation Plus] service” because doing so would take revenues away from its lucrative
5 buy-to-play business. Despite choosing not to invest in the growth of PlayStation Plus and6 excluding current first-party content from the service, Ryan revealed that PlayStation Plus is
7 “just shy of 50 million subscribers,” which is far larger than Game Pass. Subscribership to
8 PlayStation Plus would likely increase substantially if Sony added its vast catalog of hit first9 party games to PlayStation Plus day-and-date.
1056.

Some subscription services offer access to online multiplayer gameplay along

11 with other benefits, such as additional game save storage and access to a limited number of
12 catalog titles each month for free.
13

57.

Like Sony, publishers of popular games that generate significant buy-to-play

14 revenues are reluctant to allow their games to be included in subscriptions upon release because
15 of the significant cannibalization of buy-to-play revenues that can occur. Activision does not
16 allow its games to be put in multi-game subscription libraries upon release and only rarely allows
17 even its older back-catalog titles to be included in subscriptions for brief periods of time due to18 concerns about cannibalization. And nearly all Activision titles that have been included on
19 subscription services have been included only as a bonus back-catalog game for a limited period
20 of time (i.e., on Sony's Instant Game Collection) rather than in the library of a multi-game
21 content library subscription service.
22

58.

Subscription offerings compete directly with traditional buy-to-play options:23 When a game is added to a subscription library, buy-to-play sales decrease, and when a game is
24 withdrawn, buy-to-play sales increase.
25
26
27
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159.

Game Pass is not accessible on PlayStation consoles, and PlayStation Plus is not

2 accessible on Xbox consoles. Consequently, gamers cannot substitute between Game Pass and
3 PlayStation Plus without incurring the cost of switching consoles as well.
3.

4
5

60.

Cloud gaming.

Cloud gaming (also known as cloud game “streaming”) is a potential alternative

6 delivery mechanism to downloading native games for play onto hardware. Cloud gaming is a
7 euphemism for technology that runs games on remote servers that gamers can access using
8 consoles, PCs, mobile devices, or TVs. Cloud gaming can allow gamers to play games on less9 highly-powered and more affordable devices, particularly salient in less modernized nations.
1061.

Although cloud gaming technology is not new, it makes up only a tiny fraction of

11 the billions of hours of gameplay each year and has never achieved consumer demand beyond its
12 current niche.
13

62.

Several companies, including Xbox, Amazon, Nvidia, and other smaller

14 companies, have experimented with different forms of cloud gaming. But the technology remains
15 challenging, particularly for latency-sensitive multiplayer games.
16

63.

Cloud gaming has suffered from latency issues that negatively affect the gaming

17 experience. Due to those latency issues, users sometimes experience a “stuttering” effect or lags
18 in gameplay. Cloud gaming is also limited in its ability to replicate controller functions for
19 console games streamed to mobile devices.
20

64.

PlayStation CEO Jim Ryan acknowledged that cloud gaming faces substantial

21 “technical difficulties” and is “very tricky” from both a financial and technological standpoint.
22 Likewise, Sony Group’s CEO, Kenichiro Yoshida, has opined that “cloud itself is an amazing
23 business model, but when it comes to games, the technical difficulties are high.” Activision
24 executives have similarly observed that, with respect to cloud gaming technology generally,
25 “[t]he player experience isn’t simply there” and is “not probably going to be there for years to
26 come.”27
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1

65.

In 2020, Xbox launched a cloud gaming feature as part of its Game Pass

2 subscription service, known as Xbox Cloud Gaming. Unlike some other providers that offer
3 cloud gaming as a standalone service that allows users to stream games they already own
4 through a buy-to-play purchase (for example, Nvidia’s GeForce NOW and Amazon’s Luna),
5 Xbox offers cloud gaming only as a feature within the most expensive Game Pass subscription
6 tier, Game Pass Ultimate (with the exception of Fortnite, which is available to play for free on
7 Xbox Cloud Gaming via browser). The feature allows users to stream certain console games
8 available on Game Pass through the cloud, instead of downloading native versions of the games.
966.

Xbox Cloud Gaming on Game Pass Ultimate is played predominantly by Xbox

10 console players on their consoles.
11
12
13
14
15

.

16

68.

As a result of technical limitations, a large majority of Xbox Cloud Gaming users

17 report relying on the service to try new games in order to decide whether to download them
18 natively to play, rather than streaming for regular play.
19 III.

Xbox and Activision Both Face Intense Competition.

20

A.

21

Xbox has lost the console wars, and its rivals are positioned to continue todominate, including by leveraging exclusive content.

22

1.

23
24
25
26
27

69.

Xbox has consistently ranked third in consoles behind PlayStation
and Nintendo.

In 2001, Microsoft entered the gaming industry with the launch of its first Xbox

video game console, in competition with the established incumbents Sony and Nintendo. In that“generation,” Sony and Nintendo outsold Xbox by a significant margin. With every succeeding
generation over the twenty years since, Sony, Nintendo, and Xbox have remained the three major
console producers, and have been engaged in what the industry refers to as the “console wars.”28- 12 -

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170.

Sony is the dominant player in consoles. Sony PlayStation, for over two decades

2 and through five generations, has been the leading console both worldwide and in the U.S.
3 Sony’s gamer base is

as large as Xbox’s worldwide, andlarger in the United

4 States.
5

71.

Xbox’s console has consistently ranked third (of three) behind PlayStation and

6 Nintendo in sales. In 2021, Xbox had a share of 16% while Nintendo and PlayStation had shares
7 of

and

, respectively. Likewise for console revenues and share of consoles currently in

8 use by gamers (“installed base”), Xbox trails with 21% while PlayStation and Nintendo have
9 shares of
10

and

72.

, respectively.
Xboxview Nintendo Switch as a principal rival and a competitive

11 platform. The entry-level versions of the current Xbox (Series S) and Nintendo consoles are
12 offered at the same price point ($299.99). Many of the most popular games on PlayStation and
13 Xbox consoles are also available on Switch.
14
15
16

73.

As with prior generations, Sony leads in sales of “generation 9” consoles, which

17 consist of Sony’s PS5 and Xbox’s two consoles, the Series X and the budget version Series S.
18 Sony’s lead is so significant that press reports have recently declared that “Sony’s PlayStation
19 brand dominates 2021’s worldwide console market” and noted that “[b]etween console and game
20 sales, as well as their online services like PlayStation Plus and PlayStation Now, Sony has
21 claimed just under 50% of the console market with the remainder being shared between
22 Nintendo and Xbox.”
23
24
25
26

2.
74.

Building on their leading consoles, PlayStation and Nintendo rely
heavily on exclusive gaming content.

Each of the three major console companies is also a first-party game developer

and publisher.

27
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175.

As a game publisher, Sony’s in-house developer, PlayStation Studios, is

2 responsible for major hits like God of War, The Last of Us, and Spider-Man, most of which can
3 be played only on PlayStation. As a purchaser of third-party games,
4
5
6

76.

Sony views exclusive content as crucial to PlayStation’s continued success. As a

7 result, Sony offers far more exclusive first- and third-party titles than Xbox, and plans to
8 continue to acquire game studios to further its exclusive-heavy strategy. The number of exclusive
9 games available on PlayStation dwarfs the number available on Xbox, with eight exclusive
10 games on PlayStation for every one on Xbox.
11

77.

Nintendo also is a significant first party publisher with some of the most popular

12 exclusive game franchises in the world, including Mario, Zelda and Pokémon.
13

78.

Sony and Nintendo, due to their past and present successes, are able to leverage

14 their existing gamer bases, respective catalogs, and resulting revenues to maintain and grow the
15 attractiveness of their consoles.
16

79.

Nintendo Switch has been wildly successful even though it does not currently

17 have access to Call of Duty. Likewise, Sony is well-positioned to overcome any theoretical loss
18 of Activision content. As Sony’s CEO told investors in the wake of the Microsoft/Activision
19 merger, Sony can
20Sony has also proven willing to use its installed base advantage over Xbox to

21 acquire exclusive (relative to Xbox) rights to valuable third-party content.
3.

22
23

80.

Xbox approaches exclusivity on a case-by-case basis.

The economics of exclusivity differ significantly among the three major

24 platforms. The reason is simple: the larger the platform’s user base of potential purchasers
25 relative to rivals, the smaller the portion of the market that must be “bought out” (internally or
26 externally) to take a game exclusive. This basic economic calculus makes exclusivity
27 considerably more costly for Xbox than it is for Sony and Nintendo.
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1

81.

Like Sony and Nintendo, Xbox develops first-party console games at Xbox Game

2 Studios, as well as games that are created by outside developers (known as “third-party games”).
3 Sony and Nintendo both sell more first-party games than Xbox, and also generally keep those
4 first-party games exclusive to their respective consoles. By contrast, Xbox has taken the
5 approach of shipping many of its first-party games, such as Minecraft, to other platforms.
682.

Having exclusive content, however, is important to differentiate consoles—that is,

7 to give gamers a reason to buy your console. To illustrate, if one console offered gamers both
8 exclusive and non-exclusive content and the other offered only content available on the first, all
9 else being equal, gamers seeking access to the broadest range of games would naturally gravitate
10 to the console that offered exclusive content. Because of that dynamic, all three consoles have to
11 offer some exclusive content to attract gamers.
1283.

Given the need for some exclusive content to keep the Xbox relevant in the

13 console space and the reality of the costs of exclusivity, Xbox assesses whether it makes sense
14 for a game to be exclusive (and on what terms) on a “title-by-title” basis. Among other15 considerations that factor into the exclusivity decision, Xbox considers whether a game has
16 launched on multiple platforms previously or is designed to be played multiplayer with as many
17 people as possible. A related consideration is the magnitude of lost sales that would come from18 making a game exclusive. If a game is already designed for multiple platforms or the quality of
19 gameplay depends on large pools of gamers for cross-play modes, Xbox is less likely to make a
20 game exclusive. Under those circumstances, the costs of exclusivity would likely outweigh the
21 potential upside.
22

84.

Xbox’s experience with Minecraft is illustrative. Microsoft acquired Mojang, the23 developer of the Minecraft franchise, in 2014. Minecraft is one of the most successful games of
24 all time. It includes a popular multiplayer mode and has produced a large community. At the
25 time of the Mojang acquisition, Minecraft was available on Xbox, PlayStation, and PC. Xbox
26 could have made Minecraft exclusive to its own platform, yet it determined that was not in its
27 economic interest nor in the interest of the brand or the game. Instead, Xbox continued to ship28
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1 Minecraft on all those platforms post-acquisition and also made subsequent games in the
2 franchise (e.g., Minecraft: Dungeons) available for Nintendo consoles and even Sony’s
3 subscription service, PlayStation Plus. Xbox’s decision to ship Minecraft on all these platforms
4 was dictated by the economics and the desire to “not break up existing communities” of gamers.
5

85.

Xbox’s handling of the ZeniMax games is consistent with that general approach.

6 After acquiring the ZeniMax studios in 2020, Xbox has continued to release updates of existing
7 ZeniMax games such as Fallout 76 and Elder Scrolls Online on both Xbox and PlayStation,
8 because these games are designed to be played together by broad communities of gamers on
9 different platforms. Moreover, ZeniMax’s first two new games released post-transaction were
10 made exclusive to PlayStation for one-year post-launch (consistent with preexisting contractual
11 arrangements). In keeping with the need to offer some exclusive content while mitigating the
12 economic costs and damage to its player-focused brand, Xbox made the ZeniMax title Redfall
13 exclusive to Xbox, and has announced that the new single-player game Starfield, expected to
14 launch later this year, exclusive to Xbox as well. Neither of these exclusivity decisions,
15 involving new games without established communities, is likely to have a material impact on
16 console sales; indeed, Redfall has been widely panned by critics and has generated minimal
17 sales. At the same time, Xbox expects that many other future ZeniMax titles will be shipped on
18 PlayStation and Nintendo.
19

86.

In general, Xbox has a history of continuing to publish its newly acquired first-

20 party games on PlayStation after acquiring game studios.
21

B.

Activision’s content faces intense and growing competition.

22

87.

Activision’s content—in particular, the games within its three core franchises—

23 competes with a large variety of games and game franchises of all types and genres.
1.

24
25

88.

Activision has three core video game franchises.

Activision generates 80% of its annual revenue—which totaled $8.5 billion in

26 fiscal year 2022—through three video game franchises. These core video game franchises are
27
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1 Call of Duty, which is developed by Activision; World of Warcraft (“WoW”), which is developed
2 by Blizzard; and Candy Crush, which is developed by King.
389.

The Call of Duty games are “shooter” games that are based on armed conflicts. In

4 fiscal year 2022, the Call of Duty franchise generated about
5 approximately

billion in revenue, comprisingof Activision’s overall annual revenue. Call of Duty games have been

6 continuously available on both PlayStation and Xbox consoles since 2003 and are also available
7 for Mac and Windows PC and iOS and Android mobile devices. Activision typically releases a
8 new buy-to-play Call of Duty game every year at a price point of $70 each. The latest annual
9 Call of Duty titles are playable across platforms via a cross-play feature.
10

90.

Activision also develops and publishes free-to-play versions of Call of Duty

11 called Call of Duty: Warzone—available on PlayStation, Xbox, and Windows PC—and Call of
12 Duty: Mobile (“COD: Mobile”)—available on iOS and Android mobile devices—which it
13 monetizes through optional in-game microtransactions.
14

91.

King’s Candy Crush franchise consists of casual, free-to-play puzzle games made15 for mobile devices. Candy Crush generated approximately
16 2022—roughly

billion in revenue in fiscal yearof Activision’s overall annual revenue. King primarily monetizes Candy

17 Crush through optional in-game microtransactions, and also generates revenue through in-game
18 advertising placements.
19

92.

Blizzard’s WoW franchise consists of a massively-multiplayer-online fantasy role-

20 playing game, and related expansions and content, based on Blizzard’s Warcraft intellectual
21 property (“IP”). In fiscal year 2022, WoW generated about
22 approximately

billion in revenue, comprisingof Activision’s overall annual revenue. Blizzard makes WoW available only

23 for Mac and Windows PC (not consoles) and generally sells WoW to gamers as a single-game
24 subscription for $14.99 per month; Blizzard also occasionally releases WoW expansions for
25 purchase on a standalone basis.
26

93.

Beyond its three core franchises, Activision also develops and publishes other27 games, including Diablo and Overwatch, both of which are developed and published by28- 17 -

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1 Blizzard. Blizzard’s Diablo and Overwatch franchises generated approximately
2

million andmillion in revenue in fiscal year 2022, respectively. Diablo is a fantasy role-playing

3 franchise available on gaming consoles, PCs, and mobile devices. While most Diablo titles are
4 available for sale on a buy-to-play basis, the mobile entry in the Diablo franchise, Diablo
5 Immortal, is free to play. Overwatch is a free-to-play, multiplayer team-based shooter franchise
6 (which was previously buy-to-play) available on gaming consoles and PCs, which Blizzard
7 monetizes through optional in-game microtransactions.
8

94.

Activision and its various business units also have a portfolio of previously

9 successful, but largely dormant, IP that presents significant opportunities for further franchise
10 development.
2.

11
12

95.

Activision’s games face significant competition.

Despite these successes, Activision is not the biggest or most successful

13 publisher. Its share in console video game publishing is justby revenue globally and

14 by revenue in the U.S. By contrast, Nintendo captures almost a quarter of U.S. publishing
15 revenues (16

96.

) and more thanwhat Activision does on a global basis (Competition faced by Activision’s games includes games published by other17 leading independent game developers and games in iconic franchises, such as the FIFA and18 Battlefield franchises (developed by EA), the Assassin’s Creed and Rainbow Six franchises
19 (developed by Ubisoft), the Grand Theft Auto franchise (developed by Rockstar Games of Take20 Two Interactive), and the Fortnite franchise (developed by Epic Games). It also includes
21 immensely popular games published by platforms’ own first-party studios, such as Sony’s own
22 God of War, The Last of Us, and Uncharted franchises; as well as games from smaller
23 publishers, such as Innersloth’s Among Us.
24

97.

The rise of mobile gaming has broadened the competitive landscape for game25 development and publishing exponentially, leading to the emergence of major Chinese
26 competitors, like Tencent (e.g., PUBG Mobile), NetEase (e.g., Identity V), and ByteDance (e.g.,27
28- 18 -

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1 Mobile Legends: Bang Bang), who have enormous IP portfolios, complete control of their
2 domestic market, and extraordinary talent, and who are now investing heavily in the U.S. market.
398.

Because the game publishing industry is so dynamic and hits can come from4 anywhere, new publishers and games can quickly enter the market and take share. For example,
5 Fortnite was launched in 2017 and within a matter of months became a global phenomenon.
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

3.
99.

Activision has popular mobile games and the necessary experienceand expertise to expand mobile content.

Expanding audience reach through the development of compelling mobile content

is essential to Activision’s strategy. Mobile gaming now represents almost half of Activision’sannual net revenue and more than half of its user base.
100.

Activision successfully entered mobile in 2016 when it acquired King—a world-class developer of mobile games—a transaction valued at $5.9 billion. Through the Kingacquisition, Activision broadened its portfolio of iconic video game franchises by obtaining twoof the five highest-grossing mobile games in the United States at the time: Candy Crush Sagaand Candy Crush Soda Saga. Given the scale of the Candy Crush franchise, the acquisition
vastly expanded Activision’s overall audience reach.
101.

Since the King acquisition, Candy Crush has become a multi-billion dollar per

year franchise that continues to grow and that would be an incredibly attractive asset for any
potential entrant in mobile—much as it was for Activision.
102.

Success in mobile game development requires specific engineering expertise anddata analysis. A successful mobile business also must have a deep understanding of free-to-playmodels and how to service a game with live operations and a constant cadence of content. King
excels both in mobile game development and in the management of mobile games, and thesuccess of Candy Crush is driven by this expertise.
103.

Activision’s other business divisions have also cultivated robust mobile-specificexpertise in recent years and, in particular, have acquired an acumen for launching and managing
mobile entries in its popular franchises. Popular franchises are becoming more widely available28- 19 -

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1 on mobile devices, and releasing native mobile entries in such franchises is a proven means of
2 driving user engagement. Activision has pursued this strategy to great success with its Call of3 Duty and Diablo franchises through its successful releases of Call of Duty: Mobile and Diablo
4 Immortal. In fiscal year 2022 alone, Call of Duty: Mobile earned over
5 And Diablo Immortal has earned more than
6 2022, becoming one of only

in revenue.

within 11 months of its release in Junemobile games ever to reach that milestone in that same period of

7 time.
8

104.

Activision’s experiences with Call of Duty: Mobile and Diablo Immortal have

9 further fostered institutional knowledge regarding premium mobile games. Activision is now
10 developing numerous mobile entries in its popular franchises completely in-house. This includes:
11 (1) Warzone: Mobile, which Activision is developing with its own proprietary engine and that is
12 expected to release in fall 2023; (2) Warcraft Arclight Rumble, which is a mobile action strategy
13 game set within the WoW universe; and (3)
14
15
16

105.

Activision’s expertise with native mobile entries in popular franchises is extensive

17 and continuing to grow at a rapid pace: for example
18. Xbox aims to leverage this

19 expertise in developing and managing native mobile versions of popular console franchises.
20
21
22
23
24
25

4.
106.

Activision’s existing strategy depends on distributing its content
broadly.

Activision’s current relationship with Microsoft is principally governed by a basepublishing agreement, the Xbox Console Publisher Licensing Agreement (the “Xbox Console
PLA”), executed in August 2020. Under the terms of the Xbox Console PLA, Activision andMicrosoft have agreed to a

26
27
28
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1
2
3. The result is (i) that Activision receives a

4 royalty rate ofof the revenues generated by sales of more recent titles in the Call of Duty

5 franchise via the Microsoft Store if Activision meets certain requirements and (ii) that Activision
6 is eligible to receive a royalty rate of7

for other titles that meet certain requirements.

107.

8
9
10
11
12
13
14
15
16
17
18

108.

And under the terms of Activision’s

19
20
21
22
23
24
25
26
27
28
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1
2
3

109.

Activision’s current relationship with Nintendo is principally covered by

4
5
6

Activision

7 currently does not develop titles in the Call of Duty franchise for the Nintendo Switch. Activision
8 previously released titles in the Call of Duty franchise on Nintendo’s Wii and Wii U consoles but
9 has not released a Call of Duty title on a Nintendo platform since the release of Call of Duty:
10 Ghosts in 2013. While Activision could develop a Call of Duty title for the Nintendo Switch,
11 Activision has finite development resources and has chosen to deploy those resources to
12 opportunities that Activision believes present greater potential financial returns.
13
14
15
16
17
18
19
20
21
22
23

C.

Xbox has a negligible presence in mobile, the fastest growing gaming
segment.

110.

Mobile is the largest and fastest-growing sector of the gaming industry, and Xbox

has tried for years without success to gain a foothold into mobile gaming. Xbox today still has noreal mobile presence. Xbox has had almost no revenues from mobile gaming, no hit mobile
games, and no success monetizing its console games on mobile.
111.

Although Xbox has had a number of hit console games, it lacks the technicalcapability to create mobile versions of these games. Activision, by contrast, has significant
mobile game development capability.
112.

Xbox leadership has discussed the importance of a mobile acquisition dating backto the early 2010s.

24
25
26
27
28
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1
2
3

113.

4
5

The mobile component of the strategic rationale for a potential Activision

6 acquisition was well known to Xbox and Microsoft leadership due to the analysis that had been
7 conducted
8114.

The importance of mobile to the Activision deal rationale is reflected throughout

9 internal materials, including the final deck about the deal presented to the Microsoft Board of
10 Directors. In particular, Xbox was interested in Activision’s King segment, which is responsible
11 for thefree-to-play game, Candy Crush. Xbox

12 was also attracted to the success Activision had releasing the mobile Call of Duty game Call of
13 Duty: Mobile.
14 IV.
15
16
17
18
19
20
21
22
23
24
25
26
27

The Transaction Will Provide Xbox with a Position in Mobile and Expand Choicefor Gamers and Developers.
115.

Xbox’s future relevance depends on finding a way to reach the billions of gamers

who want to enjoy games regardless of location, socio-economic status, or device. Xbox is thus
betting on accessibility by making its games available through alternative payment structures, on
multiple platforms, and even via streaming technology.
116.

Xbox and Activision determined that, by merging, they could significantly

improve gaming and increase Xbox’s competitiveness.
A.

Xbox’s primary rationale for the deal is to improve its mobile presence.

117.

Xbox sees

118.

Microsoft is acquiring Activision for its talented game developers and well-of the Activision deal as the opportunity toregarded game franchises. While maintaining existing revenue streams (including sales ofActivision games to Play Station users) is required to justify the purchase price, the strategic28- 23 -

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1 value of the transaction is to (i) help Xbox meet the billions of gamers who choose to play on
2 mobile devices instead of a console or PC and (ii) learn how to make games that appeal to and3 engage gamers wherever they want to play. In addition, Xbox intends to add Activision content
4 to Game Pass, though it recognizes that doing so will significantly reduce sales of those
5 standalone games to Xbox users.
6

119.

Activision’s popular free-to-play mobile games offer Xbox consistent revenue

7 from in-game purchases and advertising. But beyond those lucrative revenue streams, Xbox
8 valued the potential access to Activision’s established mobile gamer communities, especially its
9 casual gaming audience.
10

120.

11
12
13
14
15
16
17
18
19
20
21

to bring that casual gaming audience to the Xbox platform.
B.

The transaction will give gamers more choices than would be available
absent the deal.

121.

Having lost the console wars, Xbox is betting on a different strategy than Sonyand Nintendo by making games more widely accessible.
122.

24
25
26

Xbox generates profits through game sales, not console sales. That is because

Xbox sells its consoles at a loss, effectively subsidizing gamers’ purchase of the hardware inhopes of making up the revenue through sales of games and accessories.
123.

Xbox accordingly seeks to expand access for gamers by not only continuing to

distribute Activision games everywhere they currently exist, but also making those games
available for play in new ways and on new platforms.
1.

22
23

Xbox sees an opportunity to use Activision’s existing mobile games as

124.

Xbox has made a number of commitments to maintain and expand
access to Activision Games after the Transaction.

In connection with the transaction, Xbox has made a number of commitments tomaintain and expand access to Activision games including (i) adding Activision games to Game
Pass; (ii) bringing Call of Duty to Nintendo Switch; and (iii) streaming Activision content on
third-party cloud gaming services.

27
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1

a.

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

125.

126.

25
26
27

Adding Activision games—including new releases—to Game Pass will give

gamers a new, low-cost way to pay for and access those games. And in the absence of the deal,
new Activision games would not be available on any subscription service. To date, Activision
has never placed one of its new games on a subscription service.
127.

Activision’s long and considered strategy is to not make its new games available

on multi-game subscription services.
128.

Among other concerns, Activision believes that putting new Activision games on

multi-game subscription services would “highly cannibalize” individual sales. That is, if gamers
can access new Activision games through a subscription that they already pay for, those gamers
are unlikely to make standalone purchases of those games.
129.

Given that cannibalization, no company has ever offered Activision economics

that, from Activision’s perspective, would make it profitable for Activision to release new games
onto a multi-game subscription.
130.

Over the years, Activision has refused offers to place its new games onsubscription services. For example, in 2020, while negotiating an updated partnership agreementwith Activision, Xbox sought to put certain Activision games (likeon Game Pass. Activision refused, based in part on its concern that doing so could. In the end, Xbox dropped the request.

22

24

From the day that the deal was announced, Xbox has been clear about its plans tomake Activision games available for play under its Game Pass subscription.

21

23

Xbox will add Activision games to the Game Pass subscription
service.

131.

Sony, for its part, has never asked Activision about the possibility of putting thecurrent version of Call of Duty on PlayStation Plus, largely because Activision has been so
“

” and

” about not doing so. Activision’s participation on PlayStation Plus has been

limited to a handful of back-catalog games available for a limited time (e.g., one-month), all ofwhich had been commercially available for over a year at the time of inclusion and selected in an28- 25 -

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1 effort to drive interest in Activision’s upcoming new releases, which would not be available on
2 subscription services.
3

132.

Beyond that, multi-game subscription services are inconsistent with Activision’s

4 increased use of free-to-play models.
5

133.

Ultimately, placing new Activision games on a multi-game subscription service

6 would require specific approval from Activision CEO Bobby Kotick and Activision CFO Armin
7 Zerza. Yet Mr. Kotick has expressed a “philosophical aversion” to multi-game subscription
8 services for the reasons described above. And Mr. Zerza has similarly explained that Activision’s
9 “declared strategy is not to put any games on any multi-game subscription services.”
b.

10
11

134.

Xbox will bring Call of Duty to Nintendo Switch.

Activision’s Call of Duty games have not been available on Nintendo devices for

12 over a decade.
13

135.

In February 2023, however, Xbox and Nintendo entered a ten-year agreement (a14 much longer commitment than the industry standard) to bring future Call of Duty titles to Switch
15 (and any successor Nintendo consoles) after the deal closes.
16

136.

That agreement guarantees feature and content parity, and commits Xbox to

17 releasing new Call of Duty titles on Nintendo simultaneous with their launch on other platforms.
18

137.

Post-transaction (and post-porting), approximately 100 million gamers would be

19 able to play Call of Duty on their existing Nintendo devices for the first time in many years.
20
21
22
23
24
25
26
27

c.
138.

Xbox has made contractual and regulatory commitments tostream Activision content on third-party cloud gaming services.

To date, Xbox has entered into four separate ten-year agreements with cloud

gaming providers Boosteroid, Nvidia GeForce NOW, NWare, and Ubitus to bring Activisioncontent to their platforms. It has entered into a similar letter of intent with EE Limited, asubsidiary of British Telecommunications.
139.

In addition to those agreements, during the European Commission’s regulatory

process, Xbox made binding commitments to grant streaming rights to Activision games to other28- 26 -

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1 cloud gaming services offered to consumers in the European Economic Area—regardless of
2 whether Xbox ultimately decides to stream those games on Xbox Cloud Gaming.
3

140.

These licenses will ensure that gamers that have purchased one or more

4 Activision games on a PC or console store, or that have subscribed to a multi-game subscription
5 service that includes Activision games, have the right to stream those games with any cloud
6 game streaming service of their choice and to play them on any device using any operating
7 system.
8141.

The agreements also ensure that Activision’s games available for streaming will

9 have the same quality and content as games available for traditional download.
10

142.

Margrethe Vestager, European Commissioner for Competition, said regarding the

11 commitments, “this solution fully addressed our concerns. And on top of that, it had significant
12 procompetitive effects [compared to] the pre-merger situation, where Activision does not license
13 its games to cloud services.”
14

143.

These agreements would expand consumer access to Activision’s content because

15 Activision has adopted a general “strategy of not participating in cloud streaming services.” It
16 has done so for at least three reasons.
17

144.

First, Activision has determined that cloud gaming technology is not viable for its

18 games due to its technical deficiencies. The biggest problem with cloud gaming technology is
19 that it introduces “significant latency,” which, in competitive situations, puts players on cloud
20 gaming services at a “perpetual disadvantage.”
21

145.

Activision believes it will be a decade or more before cloud gaming technology

22 might have a chance to deliver the low latency performance required to provide a good player
23 experience for fast-paced and/or online multiplayer games like Call of Duty.
24

146.

Activision has thus opted not to place its content on cloud streaming services, for

25 fear that the poor user experience associated with cloud gaming would harm Activision’s and its
26 franchises’ brands.
27
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1

147.

Second, Activision has concluded that cloud gaming’s value to consumers is

2 constrained—and rapidly being eclipsed by—improvements in the local processing capabilities
3 of mobile phones and other consumer electronics. Already powerful local hardware, including
4 mobile devices and TVs, will see “continued improvements in the micro processing capabilities,”
5 which could avoid latency issues that currently limit cloud gaming technology. As Activision has
6 determined, it is not in its best interest to invest its limited resources in cloud gaming
7 opportunities, which only offer only “speculative potential” relative to these continued
8 improvements in local hardware.
9

148.

Third, Activision has concluded that the cloud gaming distribution opportunity

10 cannot offer attractive economics because cloud gaming services lack scale. Cloud gaming
11 services are unlikely to “[result] in any material incremental new gamers joining [Activision’s]
12 ecosystem.” Meanwhile, supporting cloud gaming services would require significant investment
13 from Activision.
14

149.

Like Activision’s aversion to multi-game subscription services, Activision’s

15 aversion to cloud gaming services is borne out in practice. Activision’s content is not available
16 on any cloud gaming platforms today, and Activision has rebuffed every offer by cloud gaming
17 companies to place its content on their platforms.
18

150.

Any cloud gaming partnership would require specific approvals from Activision’s

19 senior leadership, such as Mr. Kotick and Mr. Zerza. But in the words of Mr. Kotick, cloud
20 gaming is not “realistic” for games like Call of Duty today or “in any reasonable near-term
21 future.”
22
23
24
25
26

d.
151.

Xbox has offered Sony a ten-year deal to keep Call of Duty on
PlayStation—that Sony has refused.

From the day the deal was announced, Xbox made clear its intentions to keep Callof Duty available to its substantial existing PlayStation gamer community long into the future. In
particular,

27
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1
2
3

152.

Since that time, Xbox made repeated offers to keep Call of Duty on PlayStation,

4 which Sony has rebuffed. Sony claims that losing Call of Duty would be disastrous to its
5 business, yet has refused Xbox’s proposal to license those games to PlayStation on the same
6 terms given to Xbox.
7

153.

On January 31, 2022, Microsoft sent a first written proposal to Sony. Sony took

8 nine months to provide a mark-up to this written proposal.
9154.

Sony sent Microsoft a draft publishing agreement on September 29, 2022 (the10 “Sony Proposal”). Sony states that the draft publishing agreement reflects what it “
11
12 The Sony Proposal provides for continued distribution of all Activision games on the PlayStation
13 platform at parity to Xbox. In response, Microsoft sent Sony a red-line of this draft agreement on
14 December 23, 2022. The duration of Microsoft’s commitment to Sony is a 10-year term, to take15 effect upon completion of the Transaction. This term would in any case go beyond the expected
16 starting period of the next generation of consoles (in 2028). Thus, Call of Duty will be published
17 on successor PlayStation consoles should one be released during the term of the agreement. The
18 agreement also would ensure that Call of Duty console games are offered on PlayStation at parity
19 with Xbox.
20

155.

21
22
23
24
25
26
27
28
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1

156.

Sony has consistently rejected these offers (1) in an attempt to leverage its

2 objection to the deal to extract far more favorable economic terms and rights than it currently
3 has; or (2) to increase the chances the deal is blocked by regulators.
4

157.

There is no reason for Xbox to not make this deal with Sony, as discontinuing

5 distribution of Activision’s titles on other platforms would cost Microsoft billions in revenue.
6

158.

Sony also refuses

7

Activision’s CEO Bobby Kotick has attempted to

8 discuss91011Tellingly, Mr. Ryan also said

12 privately on the day it was announced that the deal is
13
14
15
16

2.
159.

17
18
19
20
21
22
23
24
25
26
27

The economics of the transaction depend on maintaining broad accessto Activision games, including on PlayStation.

Although mobile was the primary strategic driver for Microsoft’s investment,

In other words, nearly half the deal’s value is based on the projected revenue
stream from continuing business on console and PC as usual. That includes continuing to sell
games in the popular Call of Duty franchise on both PlayStation and Xbox.
160.

For the past several years, the majority of Activision’s console business hasderived from sales on PlayStation. Activision’s SEC filings reflect that after Google and Apple,
Sony is the platform with the next largest share of Activision revenues. In fiscal year 2021, thatamounted to 15% of Activision’s consolidated net revenues. By contrast, Activision’s sales on
the Xbox platform were too low for Activision to break out.
161.

The valuation model presented to the Microsoft Board of Directors to justify thepurchase price for Activision relies on sales on PlayStation and other platforms post-acquisition.

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1
2

.

3

162.

4
5
6
7
8

163.

Because Xbox loses money on each console sold, Xbox is actually better off

9 financially having a PlayStation gamer purchase Call of Duty for PlayStation (for which Xbox
10 would collect royalties) than having a PlayStation gamer purchase an Xbox console for the sole
11 purpose of playing one Call of Duty game (because the subsidy loss would be greater than the
12 profit from the game).
13

164.

There are other reasons why it would harm Xbox to withhold Call of Duty from

14 PlayStation. Exclusivity would decimate Call of Duty’s cross-play functionality, which would
15 degrade the gameplay experience for all players. Indeed, taking Call of Duty exclusive would
16 risk destroying what makes the game so popular in the first place. According to Activision’s
17 internal documents, for Call of Duty gamers, the18” Exclusivity would thus hurt

19 even Call of Duty gamers who play on an Xbox; they would no longer be able to play with their
20 friends who play on a PlayStation.
21

165.

In addition, Xbox cannot afford to incur the reputational damage that would result

22 from pulling a popular Activision game, like Call of Duty, off PlayStation. Pulling Call of Duty
23 from PlayStation would be an unprecedented move in the industry. There are no instances of a
24 game publisher choosing to make exclusive an existing game franchise that is multiplayer, multi25 platform, and offers cross-platform play. This is in part because exclusivity is less likely to be
26 profitable for games that come from established franchises and for games with important cross27 platform, multiplayer components.
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1

166.

In short, keeping Activision games on PlayStation is both good for gamers and2 good for Xbox’s business. Xbox is thus committed to shipping Activision games, including
3 future titles of Call of Duty, on PlayStation for years to come.
4

3.

5
6
7
8
9
10
11
12
13
14
15
16
17
18

167.

Even withholding Activision content would not foreclose PlayStation
because Activision’s content is not essential for platform growth.

The broad and ever-expanding nature of competition within video gamedevelopment and publishing ensures that no one developer, studio, franchise, or game is essential
to a platform. Though Activision has enjoyed great success with its core franchises, experience
shows that Activision’s content—including Call of Duty—does not drive platform adoption andis not “must-have” or otherwise essential content on any platform.
168.

of all PlayStation gamers spent zero time playing Call of Duty in 2022. And

despite Call of Duty’s annual release cadence, in the past six years it has only been the mostplayed franchise on PlayStation by month for—in other words, justof total months

over a six-year period. By contrast, Fortnite was the most played game on PlayStation by monthinof months.
169.

If every PlayStation device that accounted for as little as two hours of Call of

Duty per month were to somehow transform into an Xbox device overnight, PlayStations would
still comfortably outnumber Xboxes. Similarly, the FTC’s economic expert, Dr. Lee,

19
20
21
22
23
24
25
26

170.

Furthermore, Call of Duty does not uniquely drive PlayStation console purchasedecisions, and it is not uniquely important as the first game played on PlayStation. In 2022,of new PlayStation owners did not play a Call of Duty game on the first day of play. And in late
2022,

opted to play Sony’s newly released title God of War: Ragnarok on their firstday of play on a new PlayStation console rather than Activision’s newly released title Call of
Duty: Modern Warfare II.

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1

171.

Three natural experiments, in particular, demonstrate that having access to Call of2 Duty content does not “make” a platform and that a lack of such content does not “break” a
3 platform.
4

172.

First, Xbox and Activision had an exclusive co-marketing agreement with respect

5 to Call of Duty titles from 2005 to 2015. During that time, Activision brought certain Call of
6 Duty content to Xbox before it brought that content to PlayStation, including map packs and7 other add-ons. Yet despite that agreement, PlayStation maintained and even grew its platform
8 lead over Xbox during that period.
9173.

Second, Activision has not released a single Call of Duty title on the Nintendo

10 Switch—and, indeed, has not released any Call of Duty titles on a Nintendo platform since it
11 released Call of Duty: Ghosts on the Nintendo Wii U in 2013. Without access to a single Call of
12 Duty title, the Nintendo Switch has still been a resounding success, and is the second-best selling
13 gaming console in the United States today, behind only Sony’s PlayStation and well ahead of
14 Microsoft’s Xbox.
15

174.

Third, Activision’s attempt to take PC digital sales of Call of Duty exclusive to its

16 Battle.net platform was a resounding failure. Before 2018, Activision sold digital versions of PC
17 Call of Duty titles on Valve’s successful Steam platform. In 2018, Activision decided to take the18 game off of Steam and make it exclusively available on Battle.net—largely in an effort to attract
19 users to, and grow, Activision’s own platform. Battle.net’s monthly active users remained
20 relatively flat during the period when it had exclusive access to digital sales of Call of Duty on
21 PC, from 2018 through 2022. Meanwhile, during that same period and without access to Call of
22 Duty, Steam’s monthly active users grew by tens of millions of users.
23

175.

Moreover, Sony would have a variety of options for responding even if Activision

24 content were withheld, including by lowering its prices, improving its console’s quality, by
25 growing its own studios organically, investing in additional third-party games, or by purchasing
26 another publisher (as it did with Bungie in 2022 while the Microsoft/Activision deal was
27 pending).
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1

176.

Ultimately, Activision’s games are but a few of the endless game options that are

2 available to gamers, who can and will play other games on their preferred platform if
3 Activision’s games are unavailable.
4 V.

Numerous Foreign Antitrust Authorities Have Approved the Transaction.

5

177.

The transaction has been cleared in nine jurisdictions. Most regulators – including

6 those in Brazil, Chile, China, Japan, Saudi Arabia, Serbia, South Korea and Ukraine 1 – have
7 cleared the transaction unconditionally. The transaction received conditional clearance in the
8 European Union (“EU”), which covers 27 countries. In Canada, the waiting period expired end
9 of last year (on October 17, 2022) without action by the Canadian competition regulator, the
10 CCB.
11178.

The United Kingdom’s (“UK’s”) Competition and Markets Authority (“CMA”)

12 has sought to block the merger, but its only objection to the transaction was that it might harm, at
13 some point in the future, the evolution of cloud gaming. Xbox is currently appealing that
14 decision.
15 VI.
16

.
179.

17
18
19
20
21

180.

22
23
24

Brazil: Clearance decision issued on Wednesday October 5, 2022 became final with the issuance of theCertificate of Clearance (signaling the decision was not appealed before the Tribunal) published on Monday
25 October 24, 2022; Chile: Unconditional clearance granted on Wednesday December 28, 2022; China:
Unconditional clearance granted on Friday May 19, 2023; Japan: Unconditional clearance granted on Tuesday
26 March 28, 2023; Saudi Arabia: Unconditional clearance granted on Thursday June 16 2022; Serbia:
Unconditional clearance granted on Friday August 12, 2022; South Korea: Unconditional clearance granted on
27 Monday May 29, 2023; Ukraine: Unconditional clearance granted on Thursday April 27, 2023.
1

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1

181.

2
3
4
5

A.

6

182.

.

7
8
9
10

183.

11
12
13
14
15

184.

16
17
18
19
20
21

185.

22
23

B.

24
25
26
27
28
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1

187.

2
3
4
5
6
7

188.

8
9
10

189.

11
12
13
14

190.

15
16

191.

17
18
19
20

192.

21
22

193.

23
24
25
26
27
28
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1

C.

2

194.

3
4
5
6
7
8
9

VII.

Dr. Carlton Demonstrates that the Transaction Would Produce Significant ProCompetitive Benefits.
195.

Vertical mergers produce efficiencies by internalizing of pricing externalities,

10 aligning the incentives of the merging firms, and reducing transaction costs between the merging
11 firms. These efficiencies must be accounted in determining the economic effect of a vertical
12 merger.
13

196.

By aligning incentives and eliminating transaction costs, the proposed merger will

14 result in Call of Duty and other Activision games being available via subscription for the first
15 time, increasing output and producing significant benefits for gamers. When Call of Duty is
16 made available in Game Pass, Game Pass subscribers will pay a lower price (nothing) for
17 Activision games, whereas before they had to pay for them. For purchasers of Activision games
18 who do not subscribe to Game Pass, the effective cost of subscribing to Game Pass drops by the
19 price they would otherwise pay for Activision games.
20

197.

The merger will also result in additional distribution of Activision content to

21 Nintendo gamers and will allow owners of Activision games to stream the games from the cloud
22 for free.
23

198.

24
25
26
27
28
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PROPOSED CONCLUSIONS OF LAW

1
2 I.

Legal Standard

3

A.

Section 7 of the Clayton Act

4

1.

Under Section 7 of the Clayton Act, the FTC bears the burden of demonstrating

5 that this merger “is likely to substantially lessen competition in the relevant market.” United
6 States v. AT&T, Inc., 916 F.3d 1029, 1032 (D.C. Cir. 2019); see 15 U.S.C. § 18; United States v.
7 Oracle Corp., 331 F. Supp. 2d 1098, 1109 (N.D. Cal. 2004) (rejecting merger challenge because
8 government failed to prove “merger will likely lead to a substantial lessening of competition”).
92.

In making this showing, the FTC cannot “veer into the realm of ephemeral

10 possibilities.” FTC v. Meta Platforms Inc., No. 5:22-cv-04325-EJD, 2023 WL 2346238, at *28
11 (N.D. Cal. Feb. 3, 2023); see also FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 115 (D.D.C.
12 2004) (Section 7 analysis “deals in probabilities not ephemeral possibilities”); United States v.
13 Baker Hughes, Inc., 908 F.2d 981, 984 (D.C. Cir. 1990) (Section 7 “involves probabilities,
14 not . . . possibilities”); Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 220
15 (D.C. Cir. 1986) (Section 7 “applies a much more stringent test than does rule-of-reason analysis
16 under section 1 of the Sherman Act”). Nor can the FTC rely on “assumptions and simplifications
17 that are not supported by real-world” facts, Am. Booksellers Ass’n v. Barnes & Noble, Inc., 135
18 F. Supp. 2d 1031, 1041 (N.D. Cal. 2001), or ignore the “economic reality” of the markets at
19 issue, Craftsmen Limousine, Inc. v. Ford Motor Co., 363 F.3d 761, 777 (8th Cir. 2004). Instead,
20 taking that economic reality into account, the agency must prove a “reasonable probability of
21 anticompetitive effect.” FTC v. Warner Commc’ns Inc., 742 F.2d 1156, 1160 (9th Cir. 1984) (per22 curiam); see also United States v. Marine Bancorp. Inc., 418 U.S. 602, 623 n.22 (1974) (alleged
23 harm to competition must be “sufficiently probable and imminent” to warrant relief).
24

3.

In vertical mergers 2 such as this, the FTC carries a particularly heavy burden

25 because “[v]ertical mergers often generate efficiencies and other procompetitive effects.” United
26

2

A vertical merger is “one that involves firms that do not operate in the same market.” AT&T, 310 F. Supp. 3d at

27 192 (citation omitted). This merger is appropriately treated as vertical because the FTC challenges only the(continued on next page)28- 38 -

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1 States v. AT&T Inc., 310 F. Supp. 3d 161, 197 (D.D.C. 2018), aff’d United States v. AT&T, Inc.,
2 916 F.3d 1029 (D.C. Cir. 2019). The standard for enjoining a vertical merger is so demanding
3 that U.S. antitrust agencies have rarely even tried to do so: until 2017, the government had not
4 litigated a challenge to a vertical merger for more than four decades, see AT&T, 310 F. Supp. 3d5 at 193–94, and its recent court challenges to vertical mergers have all failed, see id.; United
6 States v. UnitedHealth Group, No. 1:22-cv-0481, 2022 WL 4365867 (D.D.C. Sept. 21, 2022).
7

4.

Unlike in horizontal merger cases, the FTC “cannot use a short cut to establish a

8 presumption of anticompetitive effect through statistics about the change in market
9 concentration, because vertical mergers produce no immediate change in the relevant market
10 share.” AT&T, Inc., 916 F.3d at 1032. Instead, the FTC must make a merger-specific, market11 specific factual showing of how the merger is likely to result in a substantial lessening of
12 competition, taking marketplace realities into account. Id. And the “ultimate burden of
13 persuasion . . . remains with the government at all times.” Baker Hughes, 908 F.2d at 983.
14

5.

To satisfy its burden, the FTC must first “define the relevant market,” which in

15 turn requires identifying both “(1) the relevant product market and (2) the relevant geographic
16 market” in which the anticompetitive effects will allegedly occur. Meta Platforms Inc., 2023 WL
17 2346238, at *8 (citing Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962)). “The outer
18 boundaries of a product market are determined by the reasonable interchangeability of use or the
19 cross-elasticity of demand between the product itself and substitutes for it.” Brown Shoe, 370
20 U.S. at 325. Put differently, courts must “look at whether two products can be used for the same
21 purpose, and, if so, whether and to what extent purchasers are willing to substitute one for the
22 other.” United States v. H&R Block, Inc., 833 F. Supp. 2d 36, 51 (D.D.C. 2011) (citation
23 omitted). The relevant market must also be defined with precision; the government may neither
24 combine distinct markets into a single market nor artificially subdivide a market into smaller
25
26
27 combination of Activision’s game publishing business and Microsoft’s game platform business and does not allege
competitive concerns arising from any overlap in the parties’ game publishing operations.

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1 slivers. See, e.g., Hicks v. PGA Tour, Inc., 897 F.3d 1109, 1120–21 (9th Cir. 2018); FTC v. RAG2 Stiftung, 436 F. Supp. 3d 278, 294–95 (D.D.C. 2020).
3

6.

Having identified the correct market, the FTC must then prove that the merger “is4 likely to substantially lessen competition in the relevant market.” AT&T, Inc., 916 F.3d at 1032.
5

B.

Preliminary Injunction Standard

6

7.

Section 13(b) of the FTC Act authorizes federal district courts to grant a

7 preliminary injunction against a challenged merger “[u]pon a proper showing that, weighing the
8 equities and considering the Commission’s likelihood of ultimate success, such action would be
9 in the public interest.” 15 U.S.C. § 53(b). This standard requires a court to (1) “determine the
10 likelihood that the [FTC] will ultimately succeed on the merits” and (2) “balance the equities.”
11 Warner Commc’ns Inc., 742 F.2d at 1160.
128.

A sufficient likelihood of success requires “more than mere questions or

13 speculations supporting” allegations of anticompetitive conduct. Meta Platforms Inc., 2023 WL
14 2346238, at *8. The FTC meets its burden only when the evidence “raise[s] questions going to
15 the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough16 investigation, study, deliberation and determination.” Warner Commc’ns Inc., 742 F.2d at 1162.
17 Likewise, a court may not determine the agency’s “‘likelihood of success’ by [relying on] a
18 statistical calculation of the parties’ odds” before the agency tribunal. See FTC v. Meta Platforms
19 Inc., No. 5:22-CV-04325-EJD, 2022 WL 16637996, at *5 (N.D. Cal. Nov. 2, 2022). Instead, a
20 court must exercise its “‘independent judgment’ and evaluat[e] the FTC’s case and evidence on
21 the merits.” Id.
22

9.

If the FTC can establish a likelihood of success, a court must then weigh the

23 public and private equities. See FTC v. H.J. Heinz Co., 246 F.3d 708, 726–27 (D.C. Cir. 2001).
24 Public equities include the merger’s procompetitive benefits, Warner Commc’ns. Inc., 742 F.2d
25 at 1165, and the need to maintain the pre-merger “status quo” so the FTC can award effective
26 relief, H.J. Heinz Co., 246 F.3d at 726. Harm to the merging parties if the merger is enjoined—
27
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1 i.e., “private equities”—is also “entitled to serious consideration.” Warner Commc’ns. Inc., 742
2 F.2d at 1165.
3

10.

In weighing these concerns, a court must keep in mind that the issuance of a

4 preliminary injunction is an “extraordinary and drastic remedy.” FTC v. Exxon Corp., 636 F.2d
5 1336, 1343 (D.C. Cir. 1980). Thus, even where a court finds a likelihood of success on the
6 merits, it must also consider whether less intrusive alternatives would be effective to maintain the
7 status quo. Id. at 1344.
8

11.

Judicial scrutiny at the preliminary injunction stage is essential. Despite its

9 “preliminary” nature, the decision to grant or deny a preliminary injunction is often the only
10 judicial determination on the merits the merger parties will receive because such injunctions
11 often “kill, rather than suspend, a proposed transaction.” FTC v. Weyerhaeuser Co., 665 F.2d
12 1072, 1087 (D.C. Cir. 1981); see Exxon Corp., 636 F.2d at 1343 (“[A]s a result of the short life13 span of most tender offers, the issuance of a preliminary injunction blocking an acquisition or
14 merger may prevent the transaction from ever being consummated.”). For this reason, even at the
15 preliminary injunction stage, courts require “rigorous proof” to enjoin a merger. See FTC v.
16 Sysco Corp., 113 F. Supp. 3d 1, 23 (D.D.C. 2015); see also Arch Coal, Inc., 329 F. Supp. at 116
17 (“Given the stakes, the FTC’s burden is not insubstantial.”).
18 II.

The FTC Has Failed to Show That It Is Likely to Succeed on the Merits.

19

A.

The FTC Has Failed to Identify a Proper Relevant Antitrust Market.

20

12.

To meet its burden to show a substantial lessening of competition, the FTC must

21 first “define the relevant market” in which anticompetitive effects will allegedly occur. FTC v.
22 Qualcomm Inc., 969 F.3d 974, 992 (9th Cir. 2020). Defining the relevant market “is a necessary
23 predicate to deciding whether a merger contravenes the Clayton Act.” Marine Bancorp., 418
24 U.S. at 618 (internal quotation marks omitted). The burden to establish a relevant market falls
25 entirely on the FTC; a defendant has no corresponding obligation to propose alternative markets.
26 See RAG-Stiftung, 436 F. Supp. 3d at 299–300, 303.
27
28
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1

13.

A relevant market has two components: a product market and a geographic

2 market. See FTC v. CCC Holdings, Inc., 605 F. Supp. 2d 26, 37 (D.D.C. 2009). A product market
3 “identifies the products and services with which the defendants’ products compete.” Id. Its “outer
4 boundaries . . . are determined by the reasonable interchangeability of use or the cross-elasticity
5 of demand between the product itself and other substitutes for it.” Brown Shoe, 370 U.S. at 325.
6 Put another way, “products constitute part of a single product market if they are reasonably
7 interchangeable by consumers for the same purposes.” Xerox Corp. v. Media Scis., Inc., 660 F.
8 Supp. 2d 535, 543 (S.D.N.Y. 2009).
9

14.

The product market is defined by the substitutes a consumer could turn to if the

10 combined company increased price or decreased quantities, including substitutes they would not
11 prefer under pre-merger circumstances. See Oracle Corp., 331 F. Supp. 2d at 1131 (“Customer
12 preferences towards one product over another do not negate interchangeability.”). As a result,
13 even products that vary “widely” on issues like price or quality “may, in fact, be in the same
14 market” if customers could substitute them. See id. at 1121.
15

15.

A geographic market is “the area to which consumers can practically turn for

16 alternative sources of the product and in which the antitrust defendants face competition.” FTC v.
17 Cardinal Health, Inc., 12 F. Supp. 2d 34, 49 (D.D.C. 1998); accord, e.g., Marine Bancorp., 418
18 U.S. at 620–21. “Like the product market, the geographic market must correspond to the
19 commercial realities of the industry and be economically significant.” Sysco Corp., 113 F. Supp.
20 3d at 48 (internal quotation marks omitted).
21

16.

If the FTC fails to appropriately define either the product market or the

22 geographic market, the agency “has not met its burden,” and its preliminary injunction motion
23 must be denied. See RAG-Stiftung, 436 F. Supp. 3d at 309.
24

17.

Here, the FTC proposes four relevant product markets and one relevant

25 geographic market. The proposed product markets are: (i) high-performance consoles; (ii) multi26 game subscription services; (iii) cloud gaming subscription services; and (iv) a combined multi27
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1 game and cloud gaming subscription services market. The proposed geographic market is the2 United States.
318.

None of the FTC’s proposals satisfies the criteria for a relevant market. With

4 respect to the “high-performance consoles” market, the FTC’s proposed market arbitrarily
5 excludes Nintendo Switch and PC gaming in order to conjure the illusion that Xbox has market
6 power. In fact, Microsoft is the third-place console maker (out of three), and any increase in
7 market share as a result of this merger will lessen market concentration by making a straggling
8 competitor more competitive. And with respect to the other three proposed product markets, the
9 FTC presents an inaccurate picture of the gaming industry. Finally, with respect to the proposed
10 geographic market, the FTC erroneously limits the market to the United States, when in reality
11 both Microsoft and Activision compete in dynamic global markets.
1.

12
13

19.

“High-Performance Consoles” Are Not a Relevant Product Market.

The FTC offers two alternative definitions of its “high-performance consoles”

14 market: the first proposes that PlayStation and Xbox alone comprise the entire console market,
15 and the second adds the Nintendo Switch. Any relevant market, however, “must encompass the
16 product at issue as well as all economic substitutes for the product.” Newcal Indus., Inc. v. Ikon
17 Off. Sol., 513 F.3d 1038, 1045 (9th Cir. 2008) (emphasis added). Doing so “ensures that the
18 relevant product market encompasses ‘the group or groups of sellers or producers who have
19 actual or potential ability to deprive each other of significant levels of business.’” Hicks, 897
20 F.3d at 1120–21 (quoting Newcal Indus., 513 F.3d at 1045). The relevant market thus may not be
21 “contorted to meet [the FTC’s] litigation needs,” id. at 1121, because “a market definition that is
22 too narrow or excludes relevant competition is misleading,” Malaney v. UAL Corp., No. 3:1023 CV-02858-RS, 2010 WL 3790296, at *5 (N.D. Cal. Sept. 27, 2010), aff’d, 434 F. App’x 620 (9th
24 Cir. 2011). Here, both of the FTC’s proposed console market definitions fail as a matter of law
25 because the first arbitrarily excludes Nintendo and they both arbitrarily exclude PCs.
26
27
28
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a.

1
2

20.

The Console Market Must Include Nintendo.

First, there is no basis for excluding Nintendo from any market. The Nintendo

3 Switch is the second most popular and fastest growing console among the three major
4 developers. In terms of installed base
5 distant third behind Sony, units sold) and Nintendo, and revenue. By excluding Nintendo, the

6 FTC artificially elevates Xbox’s market share from
7

21.

Xbox is a.

Contrary to the position of the FTC and its expert, Sony, Nintendo, and Xbox all

8 compete in a dynamic platform market, as evidenced by gamer behavior, marketplace dynamics,
9 and. Gamer behavior demonstrates that

10 Xbox and PlayStation compete with the Switch for customers and playtime. In particular,
11
12
13

22.

Contemporaneous internal Xbox and Sony communications and sworn testimony,23.

The FTC assumes without evidence that certain features that make some Xbox

14
15
16
17

18 and PlayStation models similar to one another warrant a narrowly defined market for so-called
19 “high-performance consoles,” despite the absence of any evidence that anyone in the gaming
20 industry uses that terminology. In reality, consumers weigh a variety of factors—including
21 performance, cost, and game library—and goods can be substitutes for one another even where
22 they vary dramatically on qualities such as “price, use and qualities.” See, e.g., Oracle Corp.,
23 331 F. Supp. at 1131. In fact, Xbox and PlayStation differentiate their own products in material
24 ways in order to compete with each other and the Switch along each of these dimensions.
25
26
27

3

28
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1

24.

Price. The FTC contends that Xbox and PlayStation constitute a market of two

2 because they are offered at a similar price. That is unpersuasive. To begin with, “[t]he Supreme
3 Court has repeatedly held that a price differential alone is insufficient to infer two separate
4 product markets.” HDC Med., Inc. v. Minntech Corp., 474 F.3d 543, 547 (8th Cir. 2007). Equally
5 important, the FTC’s analysis considers only the high-end models of Xbox (Series X) and6 PlayStation (Standard Edition), thereby ignoring the differentiation within Xbox’s console lines.
7 In fact, the entry-level versions of the current Xbox and Switch are offered at the same price
8 point ($299.99), and the Xbox Series S is sold for $50 less than the Switch OLED model
9 ($349.99). PlayStation likewise sells a less expensive Digital Edition for $399.99, and is
10 expected to release a PlayStation 5 Slim later this year at the same reduced price point. 4
1125.

Performance. Xbox and PlayStation are also differentiated on performance. The

12 less expensive Xbox Series S has less GPU processing power, system memory, and internal
13 storage and renders images at a lower resolution than the Xbox Series X or PlayStation 5.
14 PlayStation, meanwhile, currently offers two different versions of the PlayStation 5—one with a
15 Blu-Ray player for physical media (Standard) and one without (Digital)—and is anticipated to
16 release further differentiated Pro and Slim models in the near future. These models are
17 differentiated from Xbox offers,
18

There is simply no evidence to support the FTC’s

19 assumption that Xbox and PlayStation customers prioritize performance above all other20 measures, such that they would never even consider the Switch, when those very customers
21 make trade-offs between performance and cost.
22

26.

Content. The FTC also conveniently ignores key similarities between the

23 Nintendo Switch and the other consoles that make them clear substitutes. Most importantly,
24 many of the most popular games on PlayStation and Xbox consoles are also available on the
25 Switch, including Fortnite, Minecraft, Rocket League, Lego Star Wars, Fall Guys, and the FIFA,
26 MLB The Show, and NBA 2K franchises. Although some popular Xbox and PlayStation games
27

4

Sony is also anticipated to release a handheld version of PlayStation 5 later this year for under $300.

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1 are not available on the Switch, many of those titles are platform exclusives (e.g., the Halo
2 (Xbox) or Last of Us (PlayStation) franchises); are coming to the Switch in the near future (e.g.,3 Hogwarts: Legacy); or, in the case of the Call of Duty franchise, will become available on the
4 Switch as a result of this merger. To the extent there are differences, the FTC fails to show that
5 the differences are the result of Xbox and PlayStation games not being available on the Switch,
6 as opposed to the many Switch-exclusive titles (such as Mario and Zelda). The fact that
7 Nintendo Switch has games that are not available on Xbox or PlayStation hardly shows that the
8 Switch is a “different” product. To the contrary, because so many games are on all three
9 consoles, it is clear that there is a high degree of substitutability that undercuts any narrower
10 market definition.
11

27.

And regardless, except for pure commodities markets, every market contains

12 differentiated products. Even accepting that Xbox and PlayStation are differentiated from the
13 Switch in certain ways, including with respect to price, use, and quality, that does not decide the
14 market-definition question because products “need not be identical to be considered reasonably
15 interchangeable.” See W. Parcel Express v. United Parcel Serv. of Am., Inc., 65 F. Supp. 2d
16 1052, 1059 (N.D. Cal. 1998) (requiring “consideration of the cross-elasticity of demand”), aff’d,
17 190 F.3d 974 (9th Cir. 1999). To the contrary, it is settled law that products may differ markedly
18 and yet remain in the same product market given cross-elasticities of demand. See United States
19 v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 400 (1956) (holding that “cellophane’s
20 interchangeability with the other [flexible packaging] materials . . . suffices to make it a part of”
21 the same market despite significant differences); see Hicks, 897 F.3d at 1122 (alleged differences
22 in price and effectiveness did not imply “a distinct market”); Gorlick Distrib. Ctrs., LLC v. Car
23 Sound Exhaust Sys., Inc., 723 F.3d 1019, 1025 (9th Cir. 2013) (per curiam) (“perfect fungibility
24 isn’t required” for products to belong in the same antitrust market). Likewise, that products are
25 differentiated in ways that some customers prefer “do[es] not negate interchangeability,” because
26 the relevant question “is not what [products] the customers would like or prefer,” but instead
27 “what they could do in the event of an anticompetitive price increase.” Oracle Corp., 331 F.
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1 Supp. 2d at 1131. Here, the evidence shows that Xbox, PlayStation, and the Nintendo Switch all
2 serve as substitutes and compete. 5
b.

3
4

28.

PC Gaming Competes with Consoles.

There is also no basis for excluding PC gaming from any market. PC games can

5 be downloaded directly from publishers or can be accessed through distributors like Steam, and
6 PC gaming offers specifications and features that are comparable to or even greater than those
7 offered by consoles.
829.

There is also substantial catalog overlap. In 2022, all but one of the top 30 Xbox

9 titles and all but
1030.

of the top 30 PlayStation titles were also available on PC.

Leaders of both Microsoft

similarly, have identified PC gaming as a

11 meaningful alternative (and competitor) to console gaming.
12

2.

13
14
15
16
17
18
19
20

31.

Multi-Game Subscription Services Are Not a Relevant ProductMarket.

As for the FTC’s second proposed product market, multi-game subscription

services—such as Xbox’s Game Pass or Sony’s PlayStation Plus—are not their own market, butrather are simply an alternative way for consumers to pay for console, PC, or mobile games thatare otherwise offered as standalone buy-to-play or free-to-play games. Many game publishers,
including Sony and Activision, fear that putting newly released games into multi-game
subscription services will cannibalize sales of those games, which is why they do not embracethat subscription model.
32.

21
22
23
24
25
26
27

To the contrary, years ofdata demonstrate not only that buy-to-play sales decrease when a game is added to a subscription
library, but also that buy-to-play sales increase when a game is removed from a subscription
library. Subscription services thus compete directly with traditional buy-to-play options.
Similarly, the FTC fixates on issues that are irrelevant to consumer behavior and choices, such as whether the
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1

33.

2
3

.A

4 decision from this District has already rejected a similar effort at “narrowing of a market to
5 consideration of a subscription based payment model” rather than “the broader video game
6 market generally.” Pistacchio v. Apple Inc., No. 4:20-cv-07034-YGR, 2021 WL 949422, at *2
7 (N.D. Cal. Mar. 11, 2021); see also Reilly v. Apple Inc., 578 F. Supp. 3d 1098, 1106 (N.D. Cal.
8 2022).
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

3.
34.

Cloud Gaming Subscription Services Are Not a Relevant ProductMarket.

The FTC’s third proposed market, cloud gaming subscription services, is similarly

untenable.
35.

At the outset, cloud gaming is a feature of various types of gaming services but is

not itself a distinct gaming product. The fact that cloud gaming uses a different technology todeliver content—streaming from a central server, rather than using a disc or hard drive to enablegameplay natively on a device—does not render cloud gaming a separate antitrust productmarket. Indeed, technological differences between products “relate[] only to the respective
systems’ peculiar features,” not to whether customers would substitute one for the other. See
Ojmar US, LLC v. Sec. People, Inc., No. 16-CV-04948-HSG, 2017 WL 5495912, at *2 (N.D.
Cal. Nov. 16, 2017).
36.

The FTC mashes together gaming services that offer very different value

propositions and that use cloud streaming in very distinct ways. The FTC’s putative market
would include services like Xbox’s Game Pass, which offers some cloud gaming functionality asa relatively insignificant add-on to a subscription library of games not available via the cloud;Amazon Luna, which offers cloud-based games on a subscription basis and has a bring-yourown-game feature; and Nvidia GeForce NOW, which sells cloud streaming capabilities tocustomers so that they can play PC games that they have previously purchased through remote28- 48 -

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1 hardware via the cloud. There is no evidence that these diverse products compete with one
2 another in any meaningful sense or that customers would view them as reasonably
3 interchangeable substitutes.
437.

While not stated clearly, it appears that the FTC’s concern is not with the cloud

5 gaming market as it purportedly exists today, but a cloud gaming market that may exist someday
6 in the future. Even assuming that perceived harm to a future, hypothetical market is relevant, 6 the
7 FTC itself has recognized that projecting harm in future markets “can be difficult,” must be
8 “strongly rooted in the evidence,” and requires “considerable evidence” that the market will
9 emerge and that the merger will result in a substantial lessening of competition in that market. In
10 re Nielsen Holdings, N.V. & Arbitron Inc., FTC File No. 131-0058, at 2–3; see also, e.g., FTC v.
11 Facebook, Inc., 560 F. Supp. 3d 1, 4 (D.D.C. 2021) (rejecting FTC’s reliance on a future market
12 as “too speculative and conclusory”).
13

38.

Here, the FTC has failed to make those showings. Indeed, Sony’s CEO admitted

14 that cloud gaming faces substantial “technical difficulties” and is “very tricky” from both a
15 financial and a technological standpoint, and Activision executives believe that, due to latency
16 problems with current technology, cloud gaming is at least a decade away from delivering “an17 acceptable experience.”
18. For Xbox, cloud-

19 gaming capability is not a separate product but merely an add-on to Game Pass that allows
20 subscribers to try streaming games before downloading them.
21

39.

To the extent this market for device-agnostic cloud gaming exists, Xbox does not

22 compete in it. Of the very small segments of gamers who use Xbox cloud gaming, four in five do
23 so on Xbox. Xbox does not offer a “bring your own device” model.
24
25
26
27

The Supreme Court has never addressed whether harm to “potential competition is a viable theory of section 7
liability.” United States v. Aetna Inc., 240 F. Supp. 3d 1, 75 (D.D.C. 2017); see also Fraser v. Major League Soccer,
LLC, 284 F.3d 47, 71 (1st Cir. 2002) (noting that “there is no possible way to predict just what would happen” had achallenged transaction not occurred); SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1211 (2d Cir. 1981) (“The existing
market provides the framework in which the probability and extent of an adverse impact upon competition may bemeasured.” (emphasis added)).

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1

4.

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

40.

Multi-Game Subscription Services and Cloud Gaming Subscription
Services Are Not a Coherent or Relevant Product Market.

In addition to the separate multi-game and cloud gaming subscription services

markets, the FTC also puts forward a putative market that combines these two markets into asingle “gaming services market.” But this combined market is no more coherent or tenable thanits individual subparts. Multi-game subscriptions and cloud gaming are offered at different levelsof the video game market. Multi-game subscriptions, such as Xbox and PlayStation’s
subscription services (Game Pass and PlayStation Plus, respectively) and subscription services
offered by publishers (e.g., EA Play), are a way to purchase gaming content. Cloud gaming, incontrast, is a delivery mechanism for gaming content—whether the game was acquired from acloud platform’s native store, from a third-party developer or retailer, or, critically, from acontent library subscription provider. In other words, cloud gaming can be a feature of a
subscription service, but the two are not inherently linked—cloud gaming can also be a feature ofa buy-to-play or “freemium” acquisition model, such as Nvidia’s GeForce Now, which provides
cloud gaming functionality for gamers who have already purchased the game.
41.

The FTC offers no evidence that customers view multi-game libraries and cloud

gaming as reasonably interchangeable for one another, and indeed, cloud gaming and multi-gamelibraries cannot compete with one another when some customers will use the former to play thelatter.
5.
42.

The Relevant Geographic Market Is Global.

The FTC’s proposed geographic market is the U.S., but that narrow definition

does not reflect market realities. Both Microsoft and Activision compete in global markets.
43.

Virtually all top-selling Xbox and PlayStation games are played by gamers

worldwide and allow for cross-regional play, which gives gamers access to a larger gaming pooland provides faster access to matches, no matter where they are located. Further, both consoles
and video games are developed for and marketed on a global basis, meaning a console bought in
one country and a game bought in another will work with each other and can be used in any

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1 other country as well. All major console makers and game developers today have the same or
2 similar release dates across geographies. And those games are, with limited exceptions, identical
3 across markets.
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

B.

The FTC Has Failed to Show that the Proposed Merger Is Substantially
Likely to Lessen Competition.

44.

The FTC has alleged only a single theory of harm: vertical foreclosure. Courts

place a heavy burden on the government in vertical merger cases because vertical integration is
generally pro-competitive. See, e.g., AT&T, 310 F. Supp. 3d at 197 (“Vertical mergers often
generate efficiencies and other procompetitive effects.”); Nat’l Fuel Gas Supply Corp. v. FERC,
468 F.3d 831, 840 (D.C. Cir. 2006) (“[V]ertical integration creates efficiencies for consumers.”);Comcast Cable Commc’ns, LLC v. FCC, 717 F.3d 982, 990 (D.C. Cir. 2013) (Kavanaugh, J.,
concurring) (“Vertical integration and vertical contracts in a competitive market encourage
product innovation, lower costs for businesses, and create efficiencies—and thus reduce prices
and lead to better goods and services for consumers.”); Phillip E. Areeda & Herbert Hovenkamp,
Antitrust Law: An Analysis of Antitrust Principles and Their Application, ¶ 755c (online ed. Aug.
2022) (“Vertical integration is ubiquitous in our economy and virtually never poses a threat tocompetition when undertaken unilaterally and in competitive markets.”). Indeed, the government
itself has stated that “[v]ertical mergers . . . should be allowed to proceed except in those few
cases where convincing, fact-based evidence relating to the specific circumstances of the verticalmerger indicates likely competitive harm.” Delegation to the Organization for Economic Cooperation and Development, Competition Committee 2 (Feb. 15, 2007), bit.ly/3Cz9hIb.
45.

The FTC’s central claim is that the combined firm would withhold certain

Activision content—in particular, the Call of Duty franchise—from its console, subscription, or
cloud gaming competitors and that each of the alleged relevant markets would become
substantially less competitive as a result. Cf. UnitedHealth Grp. Inc., 2022 WL 4365867, at *25–
27 (addressing, and rejecting, analogous vertical foreclosure theory). To establish such“foreclosure” as a basis for opposing this transaction, the FTC must prove, among other things,

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1 (1) that the combined company would have the incentive to withhold Call of Duty from rivals to
2 whom an independent Activision would otherwise sell Call of Duty (i.e., that doing so would be
3 profitable despite the forgone sales), (2) that the combined company would have the ability to do
4 so (despite its long-term contracts to the contrary), and (3) that competition (as opposed to
5 individual competitors) would likely be harmed as a result. See id. 7 A vertical merger, in
6 particular, “will not have an anticompetitive effect” where “substantial market power is absent at
7 any one product or distribution level.” Auburn News Co. v. Providence J. Co., 659 F.2d 273, 278
8 (1st Cir. 1981).
946.

To make these showings, the FTC relies principally on the analysis of its expert,

1011. But the FTC’s “foreclosure theory has significant flaws,” UnitedHealth Grp.

12 Inc., 2022 WL 4365867, at *25–27, and the agency has failed to establish any likelihood of
13 ultimate success on its foreclosure claims, either in the console market or in the other allegedly
14 distinct markets for “content library services” and “cloud gaming services.” That the FTC cannot
15 establish these essential prerequisites is unsurprising: at the end of the day, the FTC’s challenge
16 is designed to protect the dominant console provider—Sony—from increased competition that
17 would flow from a merger of two entities that lack market power.
18

1.

19
20
21
22

47.

The FTC Has Failed to Show that the Merger Is Likely to Result in
Vertical Foreclosure in the Console Market.

With respect to the console market, the FTC has failed to show that Xbox would

have either the incentive or the ability to withhold Call of Duty from its rivals or that, if Xbox did
withhold Call of Duty, such an action would substantially lessen competition.

23
24
25
26
27

To the extent the FTC suggests that Brown Shoe somehow excuses this showing, it is mistaken. The FTC does notseriously claim that it can demonstrate harm from the merger without showing that Xbox has the incentive andability to withhold Call of Duty; without both, there could be no withholding in the first place. Further, as discussed
in the text and below, an antitrust plaintiff challenging a vertical merger must show not merely that withholding islikely, but also that the withholding would have significant anticompetitive effects, such as when a monopolist
withholds a critical input that rivals need to compete.

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1

a.
48.

2

Xbox has no incentive to withhold Call of Duty from its rivals.

Xbox and Activision operate in intensely competitive markets. Given this

3 competition, Xbox has strong incentives to maximize distribution of Call of Duty post-merger,
4 not restrict it. The FTC bases its contrary claim on the economic analysis of Dr. Lee, which
5 contains serious errors and ignores marketplace realities.
6

(i)

7
8

49.

Market dynamics and the real-world example of
Minecraft show that Xbox has no incentive to withhold
Call of Duty.

The FTC cannot rely on “assumptions and simplifications that are not supported

9 by real-world” facts, Am. Booksellers, 135 F. Supp. 2d at 1041, and that ignore “economic
10 reality,” Craftsmen Limousine, Inc., 363 F.3d at 777. Here, undisputed market realities create a
11 strong economic incentive for Xbox to maximize rather than withhold distribution of Call of
12 Duty.
13

50.

Both Xbox and Activision operate in fragmented and highly competitive markets.

14 As Xbox’s expert Dr. Elizabeth Bailey explained in her report, “Xbox is a distant third-place
15 console behind each of Sony and Nintendo. No matter which metric is used—console units sold,16 console revenues, or installed base—Xbox’s console is now, and has almost always been, the17 third-place console.” Likewise, Activision games account for only a modest fraction of games—
18 approximately fromto, depending on market definition (all games vs. AAA, 8 global

19 vs. U.S.).

. It is implausible that a game with this

20 market share could somehow reshape the console market. See AT&T, 310 F. Supp. 3d at 202
21 (rejecting argument that Turner content was “must-have” in the video distribution industry
22 because “[t]he evidence showed that distributors have successfully operated, and continue to23 operate, without the Turner networks or similar programming”).
24

51.

Indeed, as Dr. Bailey has explained, Call of Duty is not uniquely important to

25 Sony (or any entity). For example,

t PlayStation gamers do not play Call of Duty, and of26
27

There is no generally accepted definition of the term “AAA” as a measure of game quality, except that it refers to
the highest-quality titles.

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1 those that do play it, about

spent only a small fraction of their time playing the game. The

2 majority of Call of Duty gamers play many other video games as well. Intensity and average
3 usage of Call of Duty is

to many other games on Sony.

4
5. Although the model of “perfect competition” uses “price

6 above marginal cost . . . as a benchmark against which to measure the behavior of firms,” that
7 definition, if “applied literally,” would suggest “every firm in the United States has at least a tiny
8 bit of market power” and “describes few, if any, actual industries.” Carlton & Perloff, MODERN
9 INDUSTRIAL ORGANIZATION, at 642 4th ed. (2005). Instead, “when courts find that a firm has
10 market power, they must mean the firm has a substantial amount of market power for some
11 significant period of time.” Id.
12

52.

Given these undisputed market dynamics, Xbox would have no incentive to

13 withhold Activision content from rival console providers for two reasons. First, Xbox could not
14 realistically expect to gain market power by driving PlayStation customers to Xbox, because
15
16
17

. Xbox therefore could not raise Xbox prices as a result of withholding

18 Activision content—in fact, the only result of such a strategy would be for Xbox to incur losses
19 from reduced game sales.
20

53.

Xbox’s inability to gain market power by withholding Activision content is also

21 clear because Nintendo, for its part, outcompetes Xbox even though Nintendo does not currently
22 have access to Call of Duty. Likewise, Steam, the leading PC game store, has risen in popularity
23 without Call of Duty. That strong evidence that Call of Duty is not essential to competition may
24 account for the FTC’s attempt to exclude both Nintendo and PC gaming from the relevant
25 market.
26

54.

Even if Xbox were able to gain console customers by making Call of Duty

27 exclusive, that would in fact make the console market less concentrated and more competitive by
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1 reducing the large gap that currently separates the number one and two market actors (Sony and2 Nintendo) from the lagging third-place Xbox. Enjoining a merger that both sides agree would
3 deconcentrate an industry would be unprecedented. Indeed, making Xbox more competitive vis4 à-vis Sony and Nintendo would be a reason to approve the deal, not to block it, because “the5 antitrust laws . . . were enacted for the protection of competition not competitors.” Brunswick
6 Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (cleaned up).
7

55.

As further proof of Xbox’s lack of incentive, Xbox has offered to provide

8 Activision content to Sony for the next ten years. That Sony has refused to sign reveals not a
9 genuine fear of “foreclosure” (which it could prevent with the stroke of a pen), but rather a
10 concern that this transaction will make third-place Xbox a more effective competitor. To the
11 extent that is Sony’s concern, however, the obvious solution is to accept Activision’s offer and12 thereby guarantee Sony’s continued access to Activision content. Even if Sony remains a
13 holdout, the contractually guaranteed availability of Activision content on Nintendo’s
14 forthcoming console and other gaming platforms would make a foreclosure strategy targeting
15 Sony even more unprofitable than it would be in the absence of those guarantees because Xbox
16 would capture an even smaller percentage of dissatisfied PlayStation customers.
17

56.

Second, a foreclosure strategy would harm Xbox economically. See Sewell

18 Plastics, Inc. v. Coca-Cola Co., 720 F. Supp. 1196, 1216–17 (W.D.N.C. 1989) (rejecting antitrust
19 claim where defendants had no “economic incentive” to “lock out existing suppliers” and “raise
20 the cost of an input”). Xbox would be losing Call of Duty revenues on the largest console
21 provider, Sony. Those revenues were critical to the price Microsoft paid for Activision, the22 Board’s evaluation of the transaction, and the financial targets to which Xbox is held
23 accountable.
24

57.

Withholding Call of Duty from other platforms would cause even greater harm by

25 degrading the game and infuriating gamers. A significant appeal of Call of Duty is that it is a
26 multi-player game oft-played by groups across different platforms, including PlayStation (known
27 as cross-play or cross-platform play). Having a broad community of gamers ensures players can28- 55 -

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1 quickly and easily find groups of comparable skill levels, making the game fun. Removing Call
2 of Duty from PlayStation would dramatically shrink the community and overall matchmaking
3 pool, making the gaming experience worse for anyone left.
458.

Microsoft’s acquisition of Mojang’s Minecraft franchise in 2014 illustrates why

5 these incentives cut against withholding a multi-player game that offers cross-platform play (like
6 Call of Duty). Like Call of Duty, Minecraft is an existing franchise with substantial cross7 platform play. Under the reasoning advanced by the FTC, Xbox would have had

8 incentives to make Minecraft exclusive to Xbox. But that did not occur. On the contrary, Xbox
9 expanded access to the game and continues to make new editions of Minecraft available on
10 PlayStation, because withholding it from other platforms would lead to lost sales on other11 platforms and on Xbox due to these cross-platform network effects.
1259.

The FTC points to Xbox’s acquisition of ZeniMax as a counterexample. But the

13 comparison fails because in its game development, ZeniMax is unlike Activision, and its games
14 are unlike Call of Duty. The first two ZeniMax games that Xbox released post-acquisition
15 (Deathloop and Ghostwire) were exclusives for Sony. Since then, Xbox has released or is
16 scheduled to release two new ZeniMax games exclusive to Xbox, but unlike Call of Duty, those
17 games do not depend on or materially feature multi-player play, and they are new games without
18 existing cross-platform gaming communities. Xbox’s approach to the ZeniMax games thus says
19 nothing about what Xbox would do with an existing, multi-player, cross-platform franchise like
20 Call of Duty—unlike Minecraft, which offers a far better comparison. 9
21

60.

More broadly, there is no evidence that any game publisher has ever made an

22 existing game franchise exclusive when the game—like Call of Duty—features multi-player and
23
24
25
26
27

In drawing its analogy to Zenimax, the FTC wrongly implies that Xbox misled the European Commission about its
intent regarding future Zenimax titles. The European Commission took the extraordinary step of responding directly
when the FTC made this claim in its administrative complaint in December 2022, by stating publicly that Microsoft
did not make any “commitments” to the European Commission, nor did the European Commission “rely on any
statements made by Microsoft about the future distribution strategy concerning ZeniMax’s games.” Instead, theEuropean Commission cleared the transaction “unconditionally as it concluded that the transaction would not raisecompetition concerns.”

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1 cross-platform play on multiple platforms. For this reason, it is highly unlikely that Xbox would
2 have any incentive to do so now.
3
4
5

(ii)

The FTC’s contrary view is based on flawed economic
analysis and is without merit.

61.

6
7
8
9
10
11
12
13
14
15

62.

16
17
18
19
20
21

63.

22
23
24
25
26
27
28
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1
2
3

64.

4
5
6
7
8
9
10
11
12
13

65.

F

14
15

66.

16
17
18
19
20

67.

21
22
23
24

10

25
26
27
28
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1
2
3
4
5
6
7

68.

8
9
10
11
12
13
14
15

69.

16
17
18
19
20
21

70.

22
23
24
25
26

11

27
28
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1

71.

2
3
4
5
6
7
8
9

72.

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

***
73.

An expert can make simplifying assumptions, but the resulting model must still

accurately describe reality. The FTC cannot meet its burden with expert an opinion “based on amathematical construction” that “in turn rests on assumptions” that are both “implausible andinconsistent with record evidence.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 594 n.19 (1986) (plurality opinion); see also Brooke Grp., Ltd. v. Brown & Williamson
Tobacco Corp., 509 U.S. 209, 242 (1993) (antitrust plaintiff cannot meet its burden with expert
opinion that “is not supported by sufficient facts”). For this reason, when “there are undisputed
facts about the structure of the market that render the inference” drawn by an expert“economically unreasonable,” the “expert opinion is insufficient” as a matter of law. Rebel Oil
Co. v. Atl. Richfield Co., 51 F.3d 1421, 1435–36 (9th Cir. 1995) (citing Eastman Kodak Co. v.

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1 Image Tech. Serv., Inc., 504 U.S. 451, 468–69 (1992)). Courts therefore routinely reject expert
2 opinions that “fai[l] to incorporate economic realities,” In re Wholesale Grocery Prods. Antitrust
3 Litig., 946 F.3d 995, 1003 (8th Cir. 2019), or that rest on “unsupported assumptions,” Merit4 Motors, Inc., 569 F.2d at 673, such that they have “no anchor” in the real world, Oracle Am., Inc.
5 v. Google Inc., 798 F. Supp. 2d 1111, 1119 (N.D. Cal. 2011).
6

74.

7
8
9

b.
75.

Xbox lacks the ability to withhold Call of Duty from its rivals.

Even if Xbox did have economic incentives to make COD exclusive, FTC’s

10 foreclosure concerns would lack merit because Xbox has no ability to withhold COD from its
11 rivals. Specifically, Xbox cannot implement an exclusivity policy for any Activision content
12 because (1) all Xbox competitors other than Sony have already signed contracts that fully protect
13 their access to that content on nondiscriminatory terms for 10 years and (2) Xbox has also
14 contractually agreed to provide a version of COD to Nintendo for its upcoming console upgrade.
15

76.

The FTC must account for the “economic reality” of these existing contracts as

16 part of its burden to show that Xbox possesses the ability to withhold Call of Duty from its rivals.
17 Craftsmen Limousine, Inc., 363 F.3d at 777.
18
19

Put simply, “antitrust theory and20 speculation cannot trump facts.” Arch Coal, 329 F. Supp. 2d at 116. See AT&T, 916 F.3d at 1041;
21 RAG-Stiftung, 436 F. Supp. 3d at 304; New York v. Deutsche Telekom AG, 439 F. Supp. 3d 179,
22 227–33 (S.D.N.Y. 2020); UnitedHealth Grp. Inc., 2022 WL 4365867, at *15–24.
23

c.

24
25
26
27

77.

The FTC has not shown that withholding Call of Duty would
harm competition.

As discussed, Xbox has no incentive to make Call of Duty or any other Activision

game exclusive post-merger. But even if Xbox could be expected to make Call of Duty or other
Activision content exclusive to itself, the FTC has not shown that such exclusion would harm28
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1 competition as opposed to other competitors in the console market. See United States v. Microsoft
2 Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (en banc) (practice has an “anticompetitive effect” only
3 if it “harm[s] the competitive process and thereby harm[s] consumers,” and “harm to one or
4 more competitors will not suffice”).
5

78.

6
7

But withholding an

8 input from a competitor—exclusivity—is routine business conduct and is insufficient by itself to
9 demonstrate a lessening of competition. See Fruehauf Corp. v. FTC, 603 F.2d 345, 352 n.9 (2d10 Cir. 1979). Exclusivity arrangements (whether from contract or vertical integration) are
11 ubiquitous throughout the economy and are usually procompetitive. See, e.g., Roland Mach. Co.
12 v. Dresser Indus., Inc., 749 F.2d 380, 395 (7th Cir. 1984).
13

79.

In fact, both Sony and Nintendo have entered into a wide range of exclusivity

14 arrangements of their own with various game publishers, and each has far more such
15 arrangements than Xbox does.
16

The FTC does not argue that there is anything generally

17 anticompetitive about these existing exclusivity arrangements or that consumers would be better
18 off with fewer such arrangements. This is particularly notable because Sony—the leading
19 console player—has many times more exclusive content on PlayStation than does Xbox.
20 Moreover, Sony goes to great lengths to secure exclusive advantages from third party publishers
21 vis-à-vis Xbox. This can only be read to suggest that input exclusivity is not by itself
22 anticompetitive at all.
23

80.

Nor does this transaction exhibit any of the special features that have led other24 courts in unusual cases to conclude that vertical integration will give rise to anticompetitive
25 outcomes. In particular, Call of Duty is not a “necessary input” for Xbox rivals, see Sprint Nextel
26 Corp. v. AT&T Inc., 821 F. Supp. 2d 308, 330 (D.D.C. 2011), and any “foreclosure” percentages
27 would be far too small to warrant any presumption of competitive harm.
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1

81.

2
3

See Alberta Gas Chems. Ltd. v. E.I. Du Pont De Nemours & Co., 826 F.2d 1235,

4 1244–46 (3d Cir. 1987) (“foreclosure” concerns are only raised where withholding of inputs
5 would result in “post-merger market power”). To the contrary, to the extent the Microsoft6 Activision merger would allow Xbox to gain some console subscribers, that would only serve to
7 make the market less concentrated and presumptively more competitive.
882.

As noted, Activision’s share of console-game publishing is modest by any

9 measure—between approximately

and. Theseforeclosure figures would be far

10 smaller than the level needed to raise any presumption of anticompetitive effect even if Xbox
11 were a platform monopolist. See McWane, Inc. v. FTC, 783 F.3d 814, 838–39 (11th Cir. 2015)
12 (vertical integration is generally found to raise antitrust concerns only where it leaves rivals
13 “stunted” as competitors and materially impairs their ability to discipline the defendant’s prices);
14 see also Microsoft Corp., 253 F.3d at 70 (foreclosure of “roughly 40% or 50% share” is “usually
15 required in order to establish” a violation of Section 1 of the Sherman Act); Fruehauf, 603 F.2d
16 at 352–54; Alberta Gas, 826 F.2d at 1244–46. And, of course, Xbox is not a monopolist; it is
17 running a distant third behind Sony and Nintendo in the console market.
1883.

And, again, Call of Duty is not so uniquely important to gamers that Xbox could

19 hope to obtain substantial market power by making it exclusive to Xbox. Even if every
20 PlayStation owner that played Call of Duty for as little as two hours per month bought an Xbox,
21 the number of PlayStations would still exceed the number of Xboxes by a wide margin. And
22 Nintendo, for its part, outcompetes Xbox even though it does not currently have access to Call of
23 Duty.
24

84.

For these reasons, the FTC cannot show what it must to justify blocking this

25 vertical transaction: that the supposed foreclosure would make the combined company’s rivals
26 ineffective as competitors. See McWane, 783 F.3d at 838–39 (vertical integration is generally
27 found to raise antitrust concerns only where it leaves rivals “stunted” as competitors and28- 63 -

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1 materially impairs their ability to discipline the defendant’s prices); Microsoft Corp., 253 F.3d at
2 71 (issue is whether exclusive dealing keeps competitors “below the critical level necessary . . .
3 to pose a real threat” to defendant’s market power); Fruehauf, 603 F.2d at 352 n.9 (discussing
4 Brown Shoe and DuPont and concluding that “we are unwilling to assume that any vertical
5 foreclosure lessens competition.”). 12
6

85.

7

. If

8 Microsoft did make Call of Duty exclusive to Xbox, doing so would prompt a fierce competitive
9 response from Sony and other rivals. See Fruehauf, 603 F.2d at 352 n.9 (requiring assessment of
10 competitive response to determine whether foreclosure “lessens competition”). Sony could lower
11 prices or improve the quality of its console. Or, as Sony’s CEO told investors in the wake of
12 news of Microsoft’s acquisition of Activision, “
13
14

86.

15

Dr. Lee’s analysis, even though the “long term effects” of any proposed merger will “depend

16 in large measure on competitors’ responses.” Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d
17 227, 232 (1st Cir. 1983) (Breyer, J.); see id. at 235 (highlighting the importance of considering
18 “competitors’ responses to price shifts”); see also Arch Coal, Inc., 329 F. Supp. 2d at 148–50
19 (relying on fact that competitors “can and would expand production in response to a [merger20 induced] price increase” to deny agency’s injunction request). Indeed, such responses are the
21 essence of competition. In Paddock Publishers, Inc. v. Chicago Tribune, for example, the
22 Seventh Circuit rejected a challenge to an exclusivity agreement between incumbent newspapers
23
24
25
26
27

“Exclusive dealing” arrangements raise the same foreclosure issues as vertical integration. Under an exclusive
dealing contract, a supplier agrees to sell all of its goods through one distributor (or vice versa), thereby aligning theparties’ interests in ways similar to a vertical merger. Such arrangements are routine and “presumptively legal.”
Republic Tobacco Co. v. N. Atl. Trading Co., 381 F.3d 717, 736 (7th Cir. 2004) (“Unlike horizontal agreements
between competitors, vertical exclusive distributorships . . . are presumptively legal.”). Notably, exclusive-dealingcases arise under Section 3 of the Clayton Act, 15 U.S.C. § 14, whose text is identical to Section 7 in all relevant
respects (“may . . . substantially lessen competition”) and is thus read in pari materia with that provision. See
Fruehauf, 603 F.2d at 352 n.9; see also United States v. Phila. Nat’l Bank, 374 U.S. 321, 365–66 (1963).
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1 and several content creators by a rival newspaper. 103 F.3d 42, 44 (7th Cir. 1996). The court
2 explained that a competitor who is “deprived of access” to even the “best known” content can
3 still compete using alternative content. Id.; see also id. (“[A] newspaper deprived of access to the
4 New York Times crosswords puzzles can find others, even if the Times has the best known one.”).
587.

Finally, the FTC ignores critical variables in the economic analysis by

6 disregarding the new options the merger will create for consumers to access and play Activision
7 content. Indeed, “increased output” is a clear “indicator[] of a merger’s competitive impact.” In
8 re AMR Corp., 625 B.R. 215, 255 (Bankr. S.D.N.Y. 2021), aff’d, No. 22-901, 2023 WL 2563897
9 (2d Cir. Mar. 20, 2023); see also Ohio v. Am. Express Co., 138 S. Ct. 2274, 2289 (2018)
10 (practices that “expand[] output and improv[e] quality” are procompetitive); Chi. Pro. Sports
11 Ltd. P’ship v. NBA, 95 F.3d 593, 597 (7th Cir. 1996) (“The core question in antitrust is output.”);12 FTC v. Univ. Health, Inc., 938 F.2d 1206, 1222 (11th Cir. 1991) (“Whether an acquisition would
13 yield significant efficiencies is an important consideration in predicting whether the acquisition
14 would substantially lessen competition.”). The FTC must account for such consumer benefits in
15 determining the “competitive effects” of the merger. See FTC v. Tenet Health Care Corp., 186
16 F.3d 1045, 1054 (8th Cir. 1999). One cannot logically determine whether a merger makes
17 consumers worse off without considering the numerous new options the merger will create for
18 playing Call of Duty post-merger—including on platforms on which it is not available today. See
19 id. (“We further find that although Tenet’s efficiencies defense may have been properly rejected
20 by the district court, the district court should nonetheless have considered evidence of enhanced
21 efficiency in the context of the competitive effects of the merger.”).
22

88.

Here, the acquisition would benefit consumers by making Call of Duty available

23 on Xbox’s Game Pass on the day it is released on console (with no price increase for the service
24 based on the acquisition), on Nintendo, and on other services that allow cloud streaming.
25 Activision has historically refused to provide this type of access to Call of Duty, and every
26 Activision witness to address the matter said that business strategy would continue into the2728- 65 -

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1 foreseeable future. These clear consumer benefits likewise vitiate the FTC’s claim that the
2 merger will ultimately injure the competitive process and consumers.
3

2.

4
5

89.

The FTC Has Failed to Show That the Merger Is Likely to Result in
Vertical Foreclosure in the Content Library Subscriptions or Cloud
Gaming Markets.

The FTC’s showing is also insufficient with respect to its proposed markets for6 “content library” and “cloud gaming” subscription services.
78
9

As discussed above, those are not genuine

10 “markets” in the first place: “content library” subscriptions compete with buy-to-play (and free11 to-play), and console-independent “cloud-gaming services” (to the limited extent they exist)
12 compete with native console- and PC-based gaming.
13

90.

But even if these gaming features are considered separate “markets” for antitrust

14 purposes, the FTC’s Section 7 claims regarding “content-library” and “cloud gaming” services
15 would fail because the FTC does not allege—let alone substantiate any allegation—that the
16 merger will likely cause Activision to withhold content that it would otherwise provide to third17 party content-library or cloud-gaming providers.
18

91.

As a threshold matter, the FTC misconceives the applicable legal standard. The

19 FTC must prove that this “merger will likely lead to a substantial lessening of competition,”
20 Oracle Corp., 331 F. Supp. 2d at 1109 (emphasis added)—i.e., that the future world with this
21 merger is “likely” to be substantially less competitive than the but-for world without the merger.
22 See AT&T, 916 F.3d at 1032. 13 But the FTC does not even try to make that showing as to23

13

For these purposes, we are accepting arguendo the FTC’s premise that the relevant comparison is between a future

24 world with this merger and a future world without it. By its plain text, however, Section 7 would seem to preclude

liability here for the simple reason that Activision does not make Call of Duty available to content-library or cloud-

25 gaming providers today; thus, continued withholding of that content from content-library or cloud-gaming providers
could not constitute a “substantial lessening” of competition. See United States v. Falstaff Brewing Corp., 410 U.S.

26 526, 537 (1973) (“[w]e leave for another day the question of the applicability of § 7 to a merger that will leavecompetition in the marketplace exactly as it was” but will nonetheless result in “less competition than there would

27 have been” in the but-for world absent the transaction); Marine Bancorp., 418 U.S. at 639 (continuing to “express(continued on next page)28- 66 -

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1 content-library subscription services and cloud gaming subscription services.
2
3
4
5
6

92.

To say that a merger makes an outcome “more” likely—for example, by

7

in Dr. Lee’s words—is not to say that the merger makes

8 that outcome likely to occur: a 20% chance of rain does not mean that rain is “likely.” Again, the9 relevant question instead is whether a merger is “likely” to produce anticompetitive outcomes
10 that would not otherwise occur. See, e.g., AT&T, 310 F. Supp. 3d at 246–47; Oracle Corp., 331 F.
11 Supp. 2d at 1109. Dr. Lee must therefore show (among many other things) that an independent
12 Activision would likely support relevant services offered by third parties and that the combined
13 company likely would not.
14

Similarly, in AT&T, the court rejected a claim of increased

15 coordination risk because, inter alia, the “the Government ha[d] failed to put forward sufficient
16 evidence to show more than a theoretical ‘possibility’ of coordination,” given expert’s concession
17 “that he was ‘not in a position to say’ that coordination is ‘more likely to happen than not[.]’”
18 310 F. Supp. 3d at 246–47.
19

93.

More broadly, to carry its burden, the FTC must prove that all of the following

20 propositions are likely true:
21•

But for this merger, Activision would allow Call of Duty to be included in third-

22

party content-library or cloud-gaming services even though Activision has long23

refused to do so;

24
25

•

Xbox would nonetheless prevent Activision from making Call of Duty available tothird-party services if this merger proceeds, when the evidence shows Microsoft is

26 no view on the appropriate resolution of the question reserved in Falstaff ”). In all events, as discussed in the text,
27 the FTC’s alternative-market theories of harm fail even if the relevant Section 7 comparison is between future butfor and with-merger worlds.

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1

entering into contracts to provide even greater access than Activision2

hypothetically would; and3•

Withholding this one game from third-party providers (that have never before

4

been granted access) would nevertheless hobble third-party providers and harm5

the competitive process, even though any given consumer could readily mix and6match services from multiple providers to obtain access to his or her preferred7

line-up of games, as they commonly do in other media markets like video

8

streaming.

994.

As to the cloud-gaming “market” in particular, the FTC must further prove that

10 both of the following additional propositions are also likely to be true:
11•

That cloud gaming will develop in the near-to-intermediate term as a genuine

12

alternative to consoles or performance PCs for multi-player, fast-twitch, graphics-

13

intensive games such as Call of Duty, despite the formidable technological and14

economic obstacles that no cloud provider has yet been able to overcome; and15•

That a post-merger Xbox will become a dominant player in that cloud-gaming

16

market even though the xCloud has experienced technical difficulties, high costs,

17

and relatively low engagement associated with the service.

18

95.

The FTC cannot substantiate any of these propositions.

19

96.

First, but for this merger, Activision would be very unlikely to offer content to

20 any third-party subscription library or cloud-gaming providers in the first place. That point is
21 confirmed by Activision’s longstanding aversion to those business models, its ordinary-course
22 documents, and its executives’ testimony. See SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1211
23 (2d Cir. 1981) (“The existing market provides the framework in which the probability and extent
24 of an adverse impact upon competition may be measured.” (emphasis added)). Activision has
25 consistently concluded (1) that allowing its games into a cloud library would cannibalize more
26 profitable direct sales of its games and (2) that allowing games such as Call of Duty to be played
27 on the cloud would generate poor user experiences, thereby harming the company’s reputation.
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1 Thus, the Court concludes that the merger is likely to increase (rather than decrease) access to
2 Call of Duty on these services. As cloud-gaming provider Nvidia explained,
3
4
5

97.

Second, even assuming that Activision would license Call of Duty to some

6 content-library or cloud-service providers in the but-for world without the merger, the FTC—as
7 discussed—has alleged only that the combined company would be somewhat less likely (in a
8 comparative sense) to do so in the world with the merger. It has not alleged that the post-merger
9 company would in fact be likely to withhold that content in an absolute sense. But only the latter,10 unmade showing would be sufficient to meet the FTC’s burden to show a “likely” lessening of
11 competition.
12

98.

Third, even if the FTC could show both that an independent Activision likely

13 would make Call of Duty available to some third parties in the but-for world without the merger
14 and that the combined company likely would not do so in a post-merger world, that showing still
15 would not demonstrate any substantial lessening of competition. As discussed in the prior
16 section, exclusivity arrangements are ubiquitous, and Sony and Nintendo already make far more
17 use of them than Xbox does. And such arrangements raise no competitive concerns except in
18 narrow circumstances involving substantial market power and large foreclosure percentages,
19 neither of which is present here. See, e.g., McWane, 783 F.3d at 838–39; Microsoft Corp., 253
20 F.3d at 71; Alberta Gas, 826 F.2d at 1244–46. That point disposes of the FTC’s claims of
21 “foreclosure” in any of the alleged markets.
2299.

Fourth, as to the cloud-gaming “market,” the FTC must prove that cloud gaming

23 will develop in the near-to-intermediate term as a genuine alternative to consoles or performance
24 PCs for multi-player, fast-twitch, graphics-intensive games such as Call of Duty. But the FTC
25 has shown no such thing; it merely speculates that it could happen. The evidence indicates that
26 widespread cloud gaming of the type that could support Call of Duty and similar multiplayer,
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1 future. As Sony and others have acknowledged, network engineers are nowhere close to solving
2 the enormous technological challenges presented by that cloud game-play model, which is why
3 Activision refuses to make Call of Duty available for cloud gaming.
4100.

But under settled law, the Court cannot block a merger on the basis of speculation

5 about harm to non-existent markets that are unlikely to materialize anytime in the foreseeable
6 future. See Facebook, 560 F. Supp. 3d at 4 (rejecting the government’s “naked allegation” as
7 “too speculative and conclusory,” especially given that the market for Personal Social
8 Networking Services was “no ordinary or intuitive market” and the “exact metes and bounds” of
9 that market were “hardly crystal clear”); see also Tenneco, Inc. v. FTC, 689 F.2d 346, 354 (2d10 Cir. 1982) (rejecting the FTC’s “unsupported speculation” that “Tenneco would have entered the
11 market . . . absent its acquisition of Monroe”); Fruehauf, 603 F.2d at 355 (rejecting the FTC’s
12 theory of anticompetitive effects as “based on speculation rather than fact”).
13

101.

Fifth, the FTC’s “cloud-gaming” theory of harm assumes not only that a cloud-

14 gaming market will develop, but that Xbox will be a major player in it. In fact, the overwhelming
15 evidence confirms that the users of Xbox’s xCloud capability use it to try games they are buying
16 on console, not for the type of device-agnostic gaming that the FTC seems to believe is the
17 future.
18
19
20

102.

In all events, as explained above, Microsoft has reached agreements with Nvidia

21 and other providers that do offer nascent cloud gaming services. Those agreements ensure that
22 such cloud providers will have access to Activision content post-merger—access that they would
23 otherwise lack, given Activision’s entrenched opposition to making its games available on the
24 cloud. Tellingly, these companies support this merger even though, if the FTC’s concerns were
25 valid, they would be the “victims” of any foreclosure strategy. In Nvidia’s words,
26
27
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1 III.

The Equities Weigh Against a Preliminary Injunction.

2

103.

Because the FTC has failed to demonstrate the requisite likelihood of ultimate

3 success, there is no reason for the Court to consider the equities. Meta Platforms Inc., 2023 WL
4 2346238, at *33; see also RAG-Stiftung, 436 F. Supp. 3d at 291. “[E]quities alone will not justify
5 an injunction.” Arch Coal, Inc., 329 F. Supp. 2d at 116. Nonetheless, assuming for the sake of
6 argument that the FTC has made some showing of ultimate success, the equities—both public
7 and private—weigh against granting the “extraordinary and drastic remedy” of a preliminary
8 injunction. FTC v. Staples, 190 F. Supp. 3d 100, 115 (D.D.C. 2016).
9

104.

As a threshold matter, Microsoft’s merger with Activision does not implicate the

10 “principal” “public equity consideration [that Congress had] in mind when it enacted section
11 13(b)”—namely, the need to maintain the pre-merger “status quo” so the FTC can award
12 effective relief if it succeeds on the merits. H.J. Heinz Co., 246 F.3d at 726. This consideration
13 applies chiefly in the context of horizontal mergers where two competing companies integrate
14 their operations and, in the process, often eliminate stores, factories, or other redundant assets.
15 When that occurs, the FTC’s “inability to unscramble merged assets,” FTC v. Dean Foods Co.,
16 384 U.S. 597, 606 n.5 (1966), or revive shuttered stores post-merger may make it difficult for the
17 agency to “restore the parties to their pre-merger state,” Sysco Corp., 113 F. Supp. 3d at 87.
18

105.

Microsoft’s vertical merger with Activision, however, raises none of these19 concerns. Microsoft and Activision are not competitors in the relevant markets alleged. And
20 Microsoft intends to operate Activision similar to other recent acquisitions, such as Minecraft
21 developer Mojang. In other words, Activision’s creative operations will remain separate and22 continue to run as they did pre-merger. Consequently, even in the (unlikely) event the FTC
23 continues to press its Part 3 case and then succeeds on the ultimate merits in that proceeding, the24 agency can order Microsoft’s divesture of Activision—“an effective ultimate remedy,” FTC v.
25 Great Lakes Chem. Corp., 528 F. Supp. 84, 99 (N.D. Ill. 1981). As a result, the “principal public
26 equity” cuts against the government, H.J. Heinz Co., 246 F.3d at 726.
27
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1

106.

Other “public equities” likewise favor denying a preliminary injunction that

2 would rob consumers of the “beneficial economic effects and procompetitive advantages”
3 resulting from this merger. See FTC v. Pharmtech Rsch., Inc., 576 F. Supp. 294, 299 (D.D.C.
4 1983) (citing Weyerhaeuser Co., 665 F.2d at 1082–83); see also Warner Commc’ns Inc., 742 F.2d
5 at 1165 (“public equities” include procompetitive benefits for consumers). The merger would
6 expand the availability of content to consumers and enhance Xbox’s ability to compete against
7 the dominant console provider, Sony. While there is no risk that consumers would be injured
8 while the administrative process runs its course (even Sony’s existing contract for Call of Duty
9 runs through 2024 and it has an offer for much longer access), consummating this merger would
10 immediately benefit consumers by increasing the availability of Activision content. The “public
11 equities” therefore cut against any delay in conferring those benefits on consumers.
12

107.

Nor would a preliminary injunction simply delay those benefits. As other courts

13 have recognized in this context, an injunction would likely eliminate the consumer benefits
14 entirely because the deal must close soon or it will fall through. See Mo. Portland Cement Co. v.
15 Cargill Inc., 498 F.2d 851, 870 (2d Cir. 1974) (“the grant of a temporary injunction in a
16 Government antitrust suit is likely to [spell] the doom of an agreed merger”); Weyerhaeuser Co.,
17 665 F.2d at 1087 (“[a] preliminary injunction may kill, rather than suspend, a proposed
18 transaction”). Here, the parties’ agreement expires on July 18, so the risk of the deal falling
19 through is imminent.
20

108.

Besides denying these benefits to consumers, a preliminary injunction would also

21 cause Microsoft’s shareholders to incur substantial unrecoverable losses, such as a $3 billion
22 termination fee to Activision. Such “private equities,” too, “are entitled to serious consideration.”
23 See Warner Commc’ns Inc., 742 F.2d at 1165; Weyerhaeuser, 665 F.2d at 1083 (explaining that24 courts “have no warrant to drop private equities from the calculus”).
25

109.

In sum, the FTC does not need an injunction to safeguard its ability to award

26 effective relief and other public and private interests favor consummating this pro-competitive
27
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1 transaction. So, while “equities alone will not justify an injunction,” Arch Coal, Inc., 329 F.
2 Supp. 2d at 116 (emphasis added), in this instance they weigh decisively against granting one.
3
4 Dated: June 22, 2023
5

Respectfully submitted,
By: /s/ Beth Wilkinson

6
7 Jack DiCanio (SBN 138782)
Caroline Van Ness (SBN 281675)
8 SKADDEN, ARPS, SLATE, MEAGHER& FLOM LLP
9 525 University Avenue
Palo Alto, California 94301
10 Telephone: (650) 470-4500
Facsimile: (213) 621-5430
11 jack.dicanio@skadden.com
caroline.vanness@skadden.com
12
Steven C. Sunshine (pro hac vice)
13 Julia K. York (pro hac vice)
SKADDEN, ARPS, SLATE, MEAGHER
14 & FLOM LLP
1440 New York Avenue, N.W.
15 Washington, DC 20005-2111
Telephone: (202) 371-7000
16 Facsimile: (202) 393-5760
steven.sunshine@skadden.com
17 julia.york@skadden.com
18 Maria Raptis (pro hac vice)
Matthew M. Martino (pro hac vice)
19 Michael J. Sheerin (pro hac vice)
Evan R. Kreiner (pro hac vice)
20 Bradley J. Pierson (pro hac vice)
Jessica R. Watters (pro hac vice)
21 SKADDEN, ARPS, SLATE, MEAGHER& FLOM LLP
22 1 Manhattan West
New York, NY 10001
23 Telephone: (212) 735-3000
Fax: (212) 735-2000
24 maria.raptis@skadden.com
matthew.martino@skadden.com
25 michael.sheerin@skadden.com
evan.kreiner@skadden.com
26 bradley.pierson@skadden.com
jessica.watters@skadden.com
27

Beth Wilkinson (pro hac vice)
Rakesh N. Kilaru (pro hac vice)
Kieran Gostin (pro hac vice)James Rosenthal (pro hac vice)
Grace Hill (pro hac vice)
Anastasia M. Pastan (pro hac vice)
Sarah Neuman (pro hac vice)
Jenna Pavelec (pro hac vice)
Alysha Bohanon (pro hac vice)
WILKINSON STEKLOFF LLP
2001 M Street, N.W., 10th Floor
Washington, D.C. 20036
Telephone: (202) 847-4000
Facsimile: (202) 847-4005
bwilkinson@wilkinsonstekloff.com
rkilaru@wilkinsonstekloff.com
jrosenthal@wilkinsonstekloff.com
kgostin@wilkinsonstekloff.com
ghill@wilkinsonstekloff.com
apastan@wilkinsonstekloff.com
sneuman@wilkinsonstekloff.com
jpavelec@wilkinsonstekloff.com
abohanon@wilkinsonstekloff.com
Jonathan E. Nuechterlein (pro hac vice)
C. Frederick Beckner III (pro hac vice)
William R. Levi (pro hac vice)
Daniel J. Hay (pro hac vice)
Lucas Croslow (pro hac vice)
Manuel Valle (pro hac vice)
Aaron P. Haviland (pro hac vice)
SIDLEY AUSTIN LLP
1501 K Street, N.W.
Washington, D.C. 20005
jnuechterlein@sidley.com
rbeckner@sidley.com
william.levi@sidley.com
dhay@sidley.com
lcroslow@sidley.com
manuel.valle@sidley.com
ahaviland@sidley.com

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1 Counsel for Defendant Activision Blizzard,
Inc.
2
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10
11

Bambo Obaro (SBN 267683)
WEIL, GOTSHAL & MANGES LLP
201 Redwood Shores Parkway
Redwood Shores, CA 94065
Telephone: (650) 802-3083
Facsimile: (650) 802-3100
bambo.obaro@weil.com
Megan A. Granger (pro hac vice)
Michael Moiseyev (pro hac vice)
WEIL, GOTSHAL & MANGES LLP
2001 M Street, NW
Suite 600
Washington, DC 20036
Telephone: (202) 682-7000
Facsimile: (202) 857-0940
megan.granger@weil.com
michael.moiseyev@weil.com
Counsel for Defendant Microsoft Corp.

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