How Microsoft Turned the Tide in Its Regulatory Fight Over Activision

The first call that Satya Nadella, Microsoft’s chief executive, made in early 2022 after his company announced a $69 billion deal to buy the video game publisher Activision Blizzard was to Kenichiro Yoshida, the chief executive of Sony.

Activision made the blockbuster video game Call of Duty, and Sony made the PlayStation game console, which competed with Microsoft’s Xbox. Mr. Nadella knew Sony would be worried that Microsoft might yank Activision’s games from PlayStation.

“I just wanted to make it very, very clear to Yoshida-san, who’s someone I have a fantastic relationship with, that there should be no ambiguity in our support for the Sony platform going forward,” Mr. Nadella would later testify in court.

The call was a linchpin of Microsoft’s legal strategy to overcome immense government scrutiny of the largest consumer tech deal in decades. To complete the deal, Microsoft needed to mollify three of the most powerful and skeptical regulators in the world: the U.S. Federal Trade Commission, the European Commission in Brussels and Britain’s Competition and Markets Authority.

Microsoft slowly flipped competitors into allies, signing private deals to pre-empt concerns that it anticipated from regulators. When diplomacy didn’t work, it made a substantial concession and used expansive legal resources to grind the government agencies down.

The strategy worked. European regulators turned the private arrangements with rivals into a formal settlement. A judge in the United States repeatedly cited those side deals to let the acquisition proceed over the F.T.C.’s objections. And after initially opposing the deal, the British regulator reopened talks with Microsoft after the company made concessions to limit its control over game streaming, getting formal approval on Friday. That same day — almost 21 months after it was initially announced to the public — Microsoft closed the deal.

A Microsoft executive said the closing of the deal signaled a “good day to play” and Activision’s chief executive called it a “milestone” for the company. A spokeswoman for the Federal Trade Commission, Victoria Graham, said the agency would continue with its challenge to the deal even though it has closed. Sony declined to comment.

Microsoft leaned on an expansive lobbying and legal operation developed after its yearslong antitrust battle in the 1990s. Under Brad Smith, the company’s president and de facto head of government relations, Microsoft has built deep relationships in Washington and painted itself as a responsible corporate citizen that has shed its bellicose reputation.

It has not gone perfectly to plan. Microsoft’s charm offensive failed to sway Lina Khan, the F.T.C. chair, who has led the commission to take a more muscular stance toward the power of tech’s biggest companies. The agency challenged the deal in administrative court and then asked a federal court to stop its closing, but ultimately failed. The F.T.C. has appealed the federal court’s ruling.

Several senators also asked the F.T.C. to examine the acquisition’s impact on workers, a topic that Ms. Khan had taken interest in. Microsoft brokered an agreement to remain neutral in a unionization campaign by the Communications Workers of America, which initially opposed the deal.

The labor union began advocating on Microsoft’s behalf, directly appealing to Ms. Khan, but her focus on consumer issues prevailed. The neutrality deal remains, even though the political benefit fizzled.

And for more than half a year, Microsoft tried to woo Sony, with talks running off and on until late August, when the head of Microsoft’s gaming division, Phil Spencer, emailed a Sony executive, Jim Ryan, with a list of games that Microsoft would guarantee could remain on PlayStation.

“It was not a meaningful list,” Mr. Ryan later testified, explaining that “for example, Overwatchis on there, but Overwatch 2 is not on there, the current version of the game.”

Just as regulators were moving into more intense phases of review, any hope of an alliance with Sony petered out. So Microsoft turned to the other big console maker, Nintendo, whose immensely popular Switch device competes with Xbox and PlayStation.

Sarah Bond, an Xbox executive, testified that she had initially emailed the president of Nintendo’s North American division, Doug Bowser, hours after the deal was announced. But it was only in December that Microsoft announced an agreement to offer Call of Duty to Nintendo’s Switch. The F.T.C. wasn’t swayed, and soon sued to block the deal in its administrative court.

The F.T.C.’s suit pushed Microsoft to sign contracts that cemented its informal promises to rivals, Ms. Bond testified. “We wanted to make it absolutely clear that we would do it, and we wanted to make a legally binding commitment to demonstrate that,” she said.

Microsoft announced several of those deals with game streaming partners at a news conference in Brussels. In May, the European Union blessed the acquisition, on the condition that Microsoft keep up those streaming agreements. But the British regulator still moved to block the deal in late April, saying it was worried that Microsoft would dominate the nascent game streaming industry. To many, it looked like the deal could collapse.

Microsoft turned to an increasingly popular tactic for corporate lawyers trying to defeat regulators. While trying to get mergers approved, companies frequently promise regulators that they won’t engage in certain anticompetitive behavior, or they offer to spin off part of their operations. Regulators are increasingly rejecting those promises as inadequate and challenging mergers in court instead.

But companies have found success in defeating those court challenges by, effectively, getting a judge to agree that their promises to regulators should have been enough. In antitrust circles, the tactic is known as “litigating the fix.” Microsoft had its fix: the contracts it had reached with its rivals promising access to Call of Duty.

But it needed to get in front of a judge.

The F.T.C.’s suit in its internal court had been scheduled for trial on Aug. 8. But Microsoft was confident it could win if it made its case directly to a federal judge — something that would put pressure on the F.T.C. to drop its entire challenge before the deadline to close the deal by mid-July.

In early June, the F.T.C. emailed Microsoft, asking if the company would commit to not closing the deal until it resolved the issues in Britain, according to a person familiar with the correspondence. Microsoft said it couldn’t promise that. Quickly, the F.T.C. sued Microsoft in federal court, saying an order from the court to stop the deal from closing was “necessary because Microsoft and Activision have represented that they may consummate the proposed acquisition at any time.”

Ten days later, Microsoft had the federal trial it wanted.

The F.T.C. argued during a federal hearing in June that the agreements Microsoft had signed were confusing and rushed, and that the judge should not factor them into her consideration.

But Microsoft’s gamble worked.

The judge, Jacqueline Scott Corley, ruled in Microsoft’s favor, saying she was persuaded in part by the company’s offer of Call of Duty to other platforms. In her decision, she wrote that Microsoft “will probably not have an incentive to breach these agreements.”

Judge Corley also noted that Microsoft’s strategy had resulted in concessions that would benefit consumers.

“That scrutiny has paid off: Microsoft has committed in writing, in public and in court to keep Call of Dutyon PlayStation for 10 years on parity with Xbox,” Judge Corley wrote. “It made an agreement with Nintendo to bring Call of Dutyto Switch. And it entered several agreements to for the first time bring Activision’s content to several cloud gaming services.”

In a rare move, the British regulator then said it was reconsidering its opposition because Microsoft seemed willing to make new concessions. Microsoft formally submitted a new plan: It would transfer the streaming rights to license all current and future Activision games to Ubisoft Entertainment, a rival game publisher.

The arrangement, which would last for 15 years everywhere outside of the European Union, means Microsoft would not have the power to unilaterally make Activision’s games available exclusively on its own streaming service.

Almost two months after reviewing the revised plan, the British regulator gave Microsoft its final blessing. The company closed the deal hours later.