Judge Rules for Microsoft: Mergers Are Good

Judge Jacqueline Corley penned a remarkably shoddy decision in the Microsoft-Activision case. We have a problem with bad and often random decisions by judges.

"The idea is to create a moat that nobody else can attack." - Microsoft exec Matt Booty

Today’s piece is about a judge’s decision to rule against the Federal Trade Commission and let the biggest tech merger of all time proceed.

In 1987, Senator Joe Biden helped stop pro-monopoly Robert Bork from being confirmed to the Supreme Court. Biden has nonetheless appointed a suite of judges who believe in Bork’s antitrust philosophy.

In July of 2021, President Joe Biden gave a speech criticizing the conservative scholar Robert Bork, whose thinking dominates the judiciary and the antitrust bar. “Forty years ago, we chose the wrong path,” he said, “following the misguided philosophy of people like Robert Bork, and pulled back on enforcing laws to promote competition. We’re now 40 years into the experiment of letting giant corporations accumulate more and more power. I believe the experiment failed. We have to get back to an economy that grows from the bottom up and the middle out.”

Biden’s always had a certain disdain for elitist lawyers. In 1987, he chaired the Senate Judiciary Committee and helped block Bork from getting onto the Supreme Court. In 2021, he continued his objection to antitrust elitism. In 2021, he asked, “What have we gotten” from Bork’s philosophy? “Too many Americans who feel left behind.  Too many people who are poorer than their parents.” The problems extend far beyond poverty, we’re seeing the collapse of Hollywood, regional inequality, and drug shortages, with mergers harming industries across the board, from search to lab testing to streaming. There are serious problems everywhere. (Want a sample of some weird ones? Try… Gold mines. Academic library services. Lacrosse leagues and teams. Ammunition. Mail sorting software. Tactical helmets. Street sweeping. Etc…)

This administration has enacted many important policies to promote fair competition. I was just in Best Buy a few days ago, and saw cheap hearing aids on sale over the counter, which is something the White House fostered. But one disastrous area is the administration’s choices on judges, which are picked from the rarefied legal elite world and filled with corporate lawyers. Twenty percent of Biden’s judicial picks to the circuit court come from two firms - Skadden Arps and Wilson Sonsini - both of which are Google’s law firms. At this point, many non-corporate judges, steeped in that social world, are disdainful of government attempts to thwart consolidation, seeing expert bodies charged with upholding the public interest as obnoxious and meddling.

We can see this dynamic quite clearly today because Judge Jacqueline Scott Corley, a recent Biden appointee, authored a decision denying the Federal Trade Commission’s case to block the $69 billion merger between Microsoft and Activision. For the last five years, there’s been substantial policy discourse around the problem of corporate power, especially in tech markets. But what is increasingly clear is that this policy discourse simply isn’t penetrating the judiciary. Corley’s decision is quite a stunner, and I very much hope the Federal Trade Commission appeals, not just to save the video game industry, but because Corley is actually helping to shape the law in very dangerous ways.

First, I want to address something off the bat, because a lot of gamers have gotten extremely angry at my public commentary over Microsoft-Activision. Gamers are very interested in this decision, and for obvious reasons. Many want Microsoft to purchase Activision, because Activision is run by a highly disliked CEO, Bobby Kotick, and Sony, Microsoft’s big rival, often makes games exclusive, and acts like a bully. In addition, Microsoft uses its business software monopoly rents to cross-subsidize games, so gamers get Microsoft games cheap. If Microsoft beats the FTC, then Kotick goes away, lots of games get put onto Microsoft’s subsidized Game Pass service, and Sony gets humiliated. So I get why gamers want the deal to go through. I will note, however, that is a short-sighted view. Microsoft isn’t a charity, and it is already raising prices on Game Pass. When it monopolizes the industry, it won’t be the nice cuddly firm it seems to be right now. More importantly, this merger doesn’t just affect video games, it affects every other industry in the economy; deal bankers are sharpening pencils and saying ‘Great, the government lost! We can get mergers through everywhere else.’ Basically, if you like your high medical prices, you should be cheering on Microsoft’s win today.

So what happened in this decision? If it was so obvious that the deal should be blocked, why did the judge decide against the government? The FTC presented an excellent case, showing significant evidence, including financial modeling, that Microsoft is buying Activision - and many other video game companies - to create a Netflix of gaming where it can exclude rivals. Internal documents show Microsoft is spending “dump trucks” of money to buy up content, and many of its executives essentially said that in emails. (Microsoft, as the head of its gaming division wrote, has “the ability to spend Sony out of business.") I thought the case was clear enough. But antitrust trials are decided by judges, and judges are almost always people trained in Bork’s way of thinking.

There are some exceptions, of course, but Corley was not one of them. Her son works for Microsoft, and it was not a great sign that she saw no problem hearing a case with such a blatant conflict of interest. After listening to her comments during closing arguments, I realized she was not interested in market structure, and trusted Microsoft executives to be honest about their intentions. That’s always a red flag, when a judge blindly trusts powerful people who will make a lot of money if something goes their way. Her decision, though, is much worse than I expected.

First, she started by noting that the court was operating on Microsoft’s timetable. “Because the merger has a July 18 termination date,” she wrote, “expedited proceedings were commenced.” Microsoft has an agreement with Activision to close the deal by July 18th or it has to pay a $3 billion break-up. They can renegotiate that date, but the judge decided that this deadline, which is Microsoft’s problem, is also the court’s problem. She also rushed the decision out, and said so, because it would help Microsoft close the deal. (“Given the compressed time the Court had to issue a written opinion in light of the impending termination date…”)

To understand why this case should be appealed, however, it’s important to focus on her interpretation of the Clayton Act, the anti-merger law which states mergers that “may substantially lessen competition or to tend to create a monopoly” are unlawful. This sentence has some looseness to it, but Congress was very clear in 1950 when it last updated the law. “The purpose of the proposed bill, H. R. 2734, is to limit future increases in the level of economic concentration resulting from corporate mergers and acquisitions,” said the Senate Judiciary report on the bill. On those very grounds, a $69 billion takeover of Activision by the second largest corporation in the world, Microsoft, should be presumptively unlawful. So how did a judge get to a place where the deal became legal?

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The first thing she did was to narrow the stakes. The law is set up to address monopolization in its incipiency, which is to say, as the Supreme Court noted in 1963, “whether the consolidation was to take place in an industry that was fragmented, rather than concentrated, that had seen a recent trend toward domination by a few leaders.” This is precisely the state of the video game industry, which is seeing Sony and Microsoft gobble up game studios. But Corley said that because the FTC’s expert economist didn’t mention this trend, it wasn’t relevant. The FTC did make that argument, and the law is the law, but oh well, their economist didn’t say it, so to the judge, it’s not relevant.

Corley also narrowed the stakes in another important manner. The FTC argued that Microsoft is putting together a massive library of games, and will use those games to create a walled garden it can use to exclude rivals. While there was a lot of focus on Activision’s most popular game, Call of Duty, the FTC at the very beginning noted that “this isn't just about Call of Duty. Your Honor is going to hear about Diablo and Overwatch and others.”

Yet, here’s the judge’s summary of the FTC’s argument: “The gist of the FTC’s complaint… is that Microsoft is probably going to foreclose [Call of Duty] from its rivals for its own economic benefit to consumers’ detriment.” So the judge decided that the largest tech merger of all time would hinge on whether the FTC could prove that Microsoft would pull one video game from the Sony Playstation.

After narrowing the stakes, the judge then rewrote the law. She did this in two ways. The first is obvious, in that she simply redid the statutory text. The Clayton Act reads that mergers that “may substantially lessen competition” are unlawful. Judge Corley re-wrote this as, “the FTC must show the merger will probably substantially lessen competition.” It’s nice she was this blatant about rewriting statute, because it makes an appeal much cleaner. (I bolded the words to show the change.)

The second is less obvious. Judge Corley did what Bork sought, which is to turn the Clayton Act into purely a pure question of economics. “The core question in antitrust is output,” she wrote, rejecting how Congress originally saw the law, as a restraint on corporate power. To Corley, Congress, rather than singling out big mergers as a policy problem, wrote the law to encourage big mergers, especially when a large firm is subsidizing the consumer experience temporarily so as to capture market power on the backend. “The merger,” she wrote, “has the pro-competitive effect of expanding access to Call of Duty” because it will give “consumers a new, lower cost way to play the game.” Mergers, in other words, are good. Robert Bork couldn’t have done a better job in representing his philosophy. But it’s a flat-out contradiction of the statutory text.

Finally, Corley altered the law to make it almost impossible for the government to prove a merger is unlawful. Microsoft, after the government investigation and two months before the trial, decided that it would sign contracts with a series of rivals to attempt to mitigate the government’s case, pledging to keep Call of Duty available to rivals like the Nintendo Switch, and cloud gaming services such as that offered by Nvidia, among others. The judge ruled that because the FTC didn’t have a quantitative model of how these deals might change the dynamic, it couldn’t prove that the merger was unlawful. When the FTC noted that it is simply impossible to prove anything if a defendant can keep altering its deal, Corley’s response was essentially, too bad.

So that’s what she did to the law.

Beyond that, Corley’s decision was remarkably credulous in terms of thinking about corporate power. She accepted, for instance, statements from Microsoft’s CEO as evidence of what the firm would do. One of her points as to whether there was an incentive to block rivals from being able to access video games is that “Microsoft witnesses consistently testified there are no plans” to do that. Yet when Microsoft bought the video game publisher ZeniMax, it pledged to keep its games available on multiple platforms. Instead Microsoft made future games exclusive. Corley never really grapples with that inconsistency, just accepting the words of the CEO of Microsoft as if that’s clear evidence for what the firm will do.

Judge Corley also accepted at face value that Microsoft “anticipates irreparable reputational harm” if it pulls Activision games from rival platforms. But reputational harm isn’t important for a monopolist. In the 1990s, Microsoft was involved in the most important monopolization fiasco in 50 years. How much reputational harm did Microsoft suffer as a result of 1998-2001 and where is that evidence? Judge Corley demanded significant amounts of evidence from the FTC to prove its claims, but somehow, she accepts Microsoft’s assertions themselves as evidence.

On a basic level, my sense is that the judge just thought there was a battle between Sony and Microsoft, with no larger questions at stake. The FTC was taking Sony’s side, she thought, and Sony is no better than Microsoft, because it has its own exclusive games and charges more (since it cross-subsidizes Game Pass prices with its monopoly revenue stream in business software). "After the merger, consumers can utilize the cloud to play on the device of choice, including, it is intended, on the Nintendo Switch,” she wrote. “Perhaps bad for Sony. But good for Call of Duty gamers and future gamers." The notion there is a public interest that goes beyond a battle between two companies escaped the thinking of Corley.

I have watched a bunch of antitrust trials, and while there are often bad decisions, I am rarely offended by the attitude of a judge. But in this case, I actually was. Corley, aside from being totally unconcerned with her son’s financial interest in Microsoft, simply didn’t take video gaming seriously. “‘All of this is for a shooter videogame,” she commented in the midst of the trial. She also wondered why anyone would need a video game console, considering, and I’m not kidding, that during the pandemic "everyone did their work from home" and "nobody did it on a bargain basement PC." Talk about out of touch! (If you want another good analysis, antitrust lawyer Lee Hepner tweeted out an excellent list of legal and factual problems with the judge’s decision, and put out a short document on the matter as well.)

While the ruling is a blow, the actual conflict in this case isn’t over. The UK’s Competition and Markets Authority is caving after this judge’s ruling, but the FTC can appeal, and it can also go through with its own administrative trial. I hope they do so. The bottom line is that a judge made a decision that was sloppy, legally inept, and dangerous. At some level, when a random person with no understanding of antitrust law or business can reorganize a $200 billion industry based on vibes, we’ve got a serious problem. Naturally, it’s not a new problem; the judiciary couldn’t handle complex antitrust cases as soon as the Sherman Act was passed in 1890, so in 1913, Congress established the Federal Trade Commission to be a public body that could help the government and the judiciary understand business. Unfortunately, today, both liberal and conservative legal elites, including the judges appointed by Biden, see this commission, and the Antitrust Division, as a nettlesome pest.

And for Biden’s future judicial appointments, that’s got to change.

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cheers,

Matt Stoller