FTC sues to block Microsoft’s acquisition of Activision Blizzard
The Federal Trade Commission said on Thursday it has filed an antitrust case against Microsoft to challenge the software maker’s attempt to acquire video game publisher Activision Blizzard, claiming it would violate U.S. law.
This isn’t Microsoft’s first time dealing with competitive pressure. In 1998 the U.S. Justice Department filed a broad antitrust case against the company. Microsoft changed some practices related to its Windows operating system business as a result. Regulators in the United Kingdom are looking into whether the Activision Blizzard acquisition would lessen competition in the country.
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Microsoft announced plans to acquire Activision Blizzard for $68.7 billion in January, with the goal of closing it by June 2023. The deal has come under pressure from Microsoft’s competitors in gaming, such as Sony. Microsoft has repeatedly said it won’t be the world’s leader in gaming if the deal were to close, and it has vowed to provide popular “Call of Duty” games on gaming platforms other than those owned by Microsoft.
“We continue to believe that this deal will expand competition and create more opportunities for gamers and game developers,” Brad Smith, Microsoft’s vice chair and president, said in a statement. “We have been committed since Day One to addressing competitive concerns, including by offering earlier this week proposed concessions to the FTC. While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court.”
FTC commissioners voted 3-1 to move forward with the agency’s administrative complaint, which will go before the FTC’s internal administrative law judge. In that process, the ALJ makes an initial decision after a trial-like proceeding. The respondent or FTC staff serving as “complaint counsel” can choose to appeal the initial decision to the full commission for a vote. After that, the respondent could still ask a federal appeals court to review the commission’s order.
“With control of Activision’s content, Microsoft would have the ability and increased incentive to withhold or degrade Activision’s content in ways that substantially lessen competition — including competition on product quality, price, and innovation,” the FTC said in its complaint. “This loss of competition would likely result in significant harm to consumers in multiple markets at a pivotal time for the industry.”
In the statement, the FTC said Microsoft has a record, including with its 2021 ZeniMax deal, of buying games and using the moves to suppress competition from other companies that make consoles. Microsoft promised the European Commission antitrust officials that the company wouldn’t have an incentive to stop people from playin ZeniMax games on consoles other than the Xbox, but after the European Commission permitted the deal to proceed, Microsoft announced that it was making ZeniMax games such as Elder Scrolls VI, Redfall and Starfield into exclusives, the FTC said in its suit.
The FTC said Activision Blizzard has brought its games to a variety of devices, irrespective of their manufacturers, but that might change if Microsoft were to complete the deal. Microsoft could adjust prices or worsen the experience on competing hardware such as Sony PlayStation consoles, or keep Activision Blizzard consoles from reaching consoles other than Microsoft Xbox systems, the agency said.
Microsoft does offer titles that are exclusive to the Xbox, and in October Phil Spencer, CEO of gaming at Microsoft, pointed out that Sony has its own set of exclusive franchises, but over time Microsoft has brought games such as Minecraft to other devices. He argued that it’s important for more people, not less, to play games the company owns.
Microsoft is seeking to add subscribers to its Game Pass service that provides access to hundreds of games. The Game Pass Ultimate subscription tier also allows people to play games that stream from Microsoft data centers on a variety of devices, including smartphones.
The FTC said in its case that the proposed acquisition is reasonably likely to reduce competition or bring about monopolies in the markets for gaming subscription services, cloud gaming and high-performance consoles.
“We want Call of Duty to be enjoyed by more players around the world. That requires COD being on diverse platforms after the merger of Microsoft + Activision Blizzard,” Lulu Cheng Meservey, Activision’s executive vice president for corporate affairs and communications chief, said in a tweet.
The lawsuit represents a major milestone for FTC Chair Lina Khan, who has long signaled aggressive action on tech. While her tenure has included a lawsuit seeking to block Facebook owner Meta from acquiring a virtual reality fitness app developer, the lawsuit seeking to block the Microsoft-Activision deal is notable for its scale, as the largest technology transaction to date.
Khan and her counterpart at the Justice Department’s antitrust division, Jonathan Kanter, have said they want the agencies to become more comfortable with taking big swings, adding that a high win record in court likely means they aren’t challenging enough cases.
Federal enforcers have seen a string of losses in merger challenges in recent months, with the exception of one significant win by the Department of Justice in its case against Penguin Random House’s proposed acquisition of Simon & Schuster.
The FTC’s administrative law judge rejected the commission’s challenge of Illumina’s proposed acquisition of Grail in the biotech space, though the FTC said it will appeal that ruling. The Antitrust Division has also said it’s appealing or considering appealing the three merger cases it lost so far: UnitedHealth Group-Change Healthcare, US Sugar-Imperial Sugar and Booz Allen Hamilton-EverWatch.
Smith previewed Microsoft’s arguments against blocking the deal in a Wall Street Journal opinion piece published earlier this week, saying it would be a “huge mistake.”
“Microsoft faces huge challenges in the gaming industry,” Smith wrote, adding that its Xbox console gaming system is in third place behind Sony’s PlayStation and the Nintendo Switch. Microsoft also has “no meaningful presence in the mobile game industry,” he said. He pointed attention toward Apple and Google, saying that while mobile gaming is a fast growing and high revenue segment, those two app store operators take a “significant portion” of those earnings through their fees on developers.
Activision Blizzard does have a place on mobile devices thanks to its 2016 acquisition of King, which publishes the Candy Crush Saga game. The Candy Crush franchise has over 200 million monthly active users, Activision Blizzard said in November.
Smith noted that Microsoft’s purchase of Activision would let it compete effectively in the gaming industry, spurring innovation and helping customers. He downplayed concerns voiced by competitors such as Sony, saying the company is “as excited about this deal as Blockbuster was about the rise of Netflix.”
Activision Blizzard shares reached a session low of $73 per share after the FTC announced its case. Microsoft had agreed to pay $95 per share.
Bobby Kotick, Activision Blizzard’s CEO, told employees in a memo that the assertion that the deal is anti-competitive doesn’t match with the facts.
“Simply put, a combined Microsoft-ABK will be good for players, good for employees, good for competition and good for the industry,” he wrote. “Our players want choice, and this gives them exactly that.”
Politico reported last month that the FTC was likely to try to block the deal.
Technology
Apple remains Buffett’s biggest public stock holding, but his thesis about its moat faces questions
Tim Cook and Warren Buffett
Getty Images (L) | CNBC (R)
Berkshire Hathaway‘s Warren Buffett was still using a flip phone as late as 2020, four years after his investment behemoth started amassing a huge stake in the company that makes iPhones.
“I don’t understand the phone at all, but I do understand consumer behavior,” Buffett said last year at Berkshire’s annual shareholder meeting in Omaha, Nebraska.
He’s emerged in recent years as one of Apple’s top evangelists.
At the end of 2023, Berkshire owned about 6% of Apple, a stake worth $174 billion at the time, or about 40% of Berkshire’s total value. That’s about four times bigger than Berkshire’s second-biggest public stock holding, Bank of America, and makes Berkshire the No. 2 Apple shareholder, behind only Vanguard.
As Berkshire investors and fanboys of the 93-year-old Buffett flood Omaha this weekend for the 2024 annual meeting, Apple is likely to be a hot topic of discussion. The tech giant on Thursday reported a 10% year-over-year decline in iPhone sales, leading to a 4% drop in total revenue. But the stock had its best day since late 2022 on Friday due largely to a $110 billion stock buyback plan and increased margins that result from a growing services business.
The bet on Apple and CEO Tim Cook, has paid off handsomely for Buffett, who said in 2022 that the cost of Berkshire’s Apple stake was only $31 billion. His firm is up almost 620% on its investment since the start of 2016.
Despite being a self-described luddite, Buffett has long had a coherent non-techie thesis for loving Apple. He’s seen how devoted Apple users are to their devices, and has viewed the iPhone as an extraordinary product that could keep its customers spending inside the Apple ecosystem. He calls it a moat, one of his favorite words for describing his preferred businesses.
“Apple has a position with consumers that they’re paying $1,500 or whatever it may be for a phone, and these same people pay $35,000 for a second car,” Buffett said at last year’s meeting. “And if they had to give up their second car or give up their iPhone, they’d give up their second car!”
Data is in his favor. According to a study from Consumer Intelligence Research Partners, Apple has 94% customer loyalty, meaning that nine out of 10 current U.S. iPhone owners choose another iPhone when buying a new device.
Buffett has also hailed Apple’s ability to return billions of dollars to shareholders annually through share buybacks and dividends, a capital allocation strategy for which Buffett may have himself to thank. When asked in a 2016 interview with The Washington Post who he turns to for advice at pivotal moments, Cook offered up a story about his relationship with Buffett.
“When I was going through [the question of] what should we do on returning cash to shareholders, I thought who could really give us great advice here? Who wouldn’t have a bias?” Cook said. “So I called up Warren Buffett. I thought he’s the natural person.”
Apple has shown its appreciation for the Oracle of Omaha in other ways.
In 2019, the company published an original iPhone game called “Warren Buffett’s Paper Wizard” in which a paperboy bikes from Omaha to Apple’s hometown of Cupertino, California.
But with Apple’s business having declined in size in five of the past six quarters and with the company expecting just low-single digit growth in the current quarter, Buffett may face questions this weekend about whether he still sees the same power in the moat, particularly with regulatory pressures building around tech’s megacap companies.
Buffett trimmed his stake in Apple late year, though only by about 1%. Even after Friday’s rally, the stock is down 3.8% in 2024, while the S&P 500 is up 7.5%.
‘Very, very, very locked in’
Berkshire’s initial foray into Apple in 2016 was not Buffett’s idea. Rather, the investment was led by Ted Weschler, one of Buffett’s top deputies, and was seen as a passing of the torch to the next generation of Berskhire investment mangers.
But the following year, Berkshire started purchasing even more Apple, and Buffett began talking it up. He said he liked the stock and the company’s “sticky” product, although he didn’t use it.
In 2018, he said Apple users are “very, very, very locked in, at least psychologically and mentally” to the product and the ecosystem.
“Apple has an extraordinary consumer franchise,” he said.
At last year’s annual meeting, when asked how Berkshire can defend having Apple make up so much of its public portfolio, Buffett said, “It just happens to be a better business than any we own.” He also hailed Cook, calling him one of the “best managers in the world.”
A number Apple likes to use to tout the health of its business, despite the declining revenue, is 2.2 billion. That’s how many devices the company says are currently in use and points to the massive customer base available as Apple rolls out new subscription services.
“Once customers get into the ecosystem, they don’t leave. So it’s not a a speculative tech play,” said Dan Eye, chief investment officer at Fort Pitt Capital Group, which owns Apple shares. “It’s kind of more like an annuity and I think that’s what Warren Buffett really sees as well.”
In addition to the drop in revenue, Apple faces new challenges from regulations and weak overseas markets, as well as from Microsoft and Google’s advancements in artificial intelligence. For regulators, the concern surrounds the very moat that Buffett finds so attractive, and whether its give the company monopolistic control in the smartphone market.
The U.S. government in March alleged that Apple designs its business to keep customers locked in. The Justice Department’s lawsuit claimed that products like Apple Card, the Apple Arcade game subscription, iMessage, and Apple Watch work best or only with an iPhone, creating illegal barriers to competition and making it harder for consumers to switch when it’s time for an upgrade.
However, the litigation is expected to take years, pushing any potential penalties to Apple and its products well into the future. In the meantime, there’s no sign that the iPhone is becoming less important as new devices like virtual reality goggles have found only niche audiences, while consumer AI products have failed to take off.
Buffett hasn’t voiced his view publicly on Apple’s regulatory hurdles, and this will be the first opportunity for investors to ask him about the issue since the DOJ’s lawsuit. But Buffett knows a little something about regulation — two markets where he’s most active are railroads and insurance.
In a note to clients earlier this month, Bernstein analyst Toni Sacconaghi didn’t go deep on regulatory concerns, but mentioned that he doesn’t believe the DOJ suit will “seriously threaten” the strength of Apple’s ecosystem. He also said that following Buffett’s lead on getting in and out of Apple is a solid strategy for making money.
“Despite his reputation as a long term buy and hold investor, Warren Buffett has been remarkably disciplined at adding to his Apple position when it is relatively cheap and trimming when it is relatively expensive,” Sacconaghi wrote. He encouraged investors to “be like Buffett.”
More money back
Odds are that Buffett was thrilled with Apple’s announcement this week regarding its expanded repurchase program. It’s a practice he’s long adored.
“When I buy Apple, I know that Apple is going to repurchase a lot of shares,” he said in 2018.
And he likes to note how buybacks result in getting a bigger stake in the company without buying more shares.
“The math of repurchases grinds away slowly, but can be powerful over time,” Buffett said in 2021.
Apple also increased its dividend by 4%, and signaled that it would continue to lift it annually.
Buffett was effusive about Apple’s capital return strategy at the company’s annual meeting last year, pointing out that it helped Berkshire own a bigger piece of the pie. Unlike insurance company Geico and homebuilder Clayton Homes, which his firm owns in their entirety, Berkshire can continue to increase its stake in Apple, a fact he reminded investors of at the meeting.
“The good thing about Apple is that we can go up,” Buffett said.
WATCH: Warren Buffett’s stake in Japanese trading houses helps them focus on capital efficiency
Technology
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