The FTC was recently denied a preliminary injunction in their case against Microsoft’s acquisition of Activision, the owner of the Call of Duty franchise. After completion, the $68.7 billion merger will be the largest in tech history. The case relied on the ultimately faulty argument that after Microsoft acquired Activision it would have the incentive to remove Call of Duty from its console competitor, Sony. The U.S. District Court of Northern California’s preliminary injunction opinion demonstrated how the FTC’s two main pieces of evidence, a study by Harvard Professor Robin Lee and the FTC’s own Illumina decision, failed to support their argument.

The argument against Microsoft’s acquisition of Activision relied on Section 7 of the Clayton Act, which prohibits mergers whose result “may be substantially to lessen competition or tend to create a monopoly.” Deciding how to judge the probability of potential outcomes is the crux of the antitrust case.

A vertical merger can be anti-competitive if they foreclose the “competitors of either party from a segment of the market otherwise open to them.”  In this case, the FTC argued that Microsoft’s incentive to foreclose Call of Duty would deprive their rival, Sony, “of a fair opportunity to compete.”

To prove this, the FTC argued it only needed to show the merger is “likely to increase the ability and/or incentive of the merged firm to foreclose rivals.” Demonstrating one of these outcomes would have been easier than what was ultimately required. The court determined that the FTC needed to show both that Microsoft could foreclose games from rivals, that they were incentivized to do this, and that in doing so they would substantially lessen competition. Ultimately, the decision wasn’t primarily based on whether such an action would substantially lessen competition, the FTC shows that Microsoft could foreclose rivals but lost their case because they failed to demonstrate an incentive. 

The FTC also believed their success relied on arguments made in their March Illumina decision, not actual court precedent. Like the FTC’s argument against Microsoft, in Illumina, the FTC argued that Illumina, Inc.’s acquisition of Grail, Inc. provided an incentive and ability to foreclose on Grail’s rivals. These terms ignored the “substantially lessen competition” part of Section 7, contending that the FTC only need to prove the likelihood of foreclosure was higher with a merger than without, a straightforward target to hit. The court ultimately rejected this basis. 

The main harm that the FTC focused on is that Microsoft would foreclose Call of Duty from PlayStation. To this end, the court found that the FTC only demonstrated that Microsoft could and not that it was incentivized to do so. Partially this is due to the litany of evidence from Microsoft that removing Call of Duty from the PlayStation was not on their agenda. Microsoft witnesses testified to this effect, Microsoft’s acquisition plans assumed that Call of Duty would continue to be accessible on PlayStation, not to mention the multiple public statements by the company that have continued to confirm it will be available to PlayStation consumers.

The FTC’s argument relied on a study by Harvard Professor Robin Lee, who conducted a study on the predictive results of a Microsoft-Activision merger. Lee argued that the model demonstrated an incentive to exclude Call of Duty from PlayStation compatibility since doing so would result in a financial benefit. The issue was that Lee’s model used an arbitrary variable that if lowered by only 2.5 percent, would indicate that foreclosing Call of Duty was now unprofitable, making the model a questionable source of evidence.

Ultimately, the court found this study failed to demonstrate a financial benefit for foreclosure due to imprecise variables, and thus failed to demonstrate an incentive. Although the court accepted that Microsoft could foreclose, this was not enough to constitute an antitrust violation. The court denied the FTC’s preliminary injunction before Microsoft and Activision’s contractual merger deadline of July 18 (which has since been extended). The FTC’s failure, in this case, is only one of the latest in a growing list of failed antitrust lawsuits. Understanding the details helps demonstrate how the FTC makes glaringly bad decisions in arguing its case and conducting its organization.

Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.