Microsoft on Tuesday cleared a significant hurdle to its $68.7 billion acquisition of Activision Blizzard, as a federal judge sided with the company in a legal battle with the Federal Trade Commission.
If it does complete the acquisition, there’s a lot more work ahead for Microsoft, not only to complete the deal, but to make it a success.
The merger with Activision Blizzard would give Microsoft several of the most popular gaming franchises in the world, but the Redmond company would also be responsible for one of the most neglected, toxic offices in the modern industry.
In a real-estate metaphor, Activision Blizzard is a nice-looking house in a good neighborhood, but once you get inside, it’s visibly falling apart.
While the company is still in excellent financial shape, particularly after the successful June launch of the dungeon crawler Diablo IV, Activision Blizzard has come under repeated, consistent fire for the last several years for multiple internal issues.
The company has faced a number of lawsuits amid reports of a “pervasive ‘frat boy’ workplace culture” where female employees were subjected to “constant sexual harassment.”
Activision paid a $35 million settlement to the Security Exchange Commission in February to settle a probe into workplace misconduct issues, in a deal that did not require Activision to admit to wrongdoing.
In May the company released its first transparency report that said it received 114 reports of harassment, discrimination, or retaliation by employees last year.
“Even one instance of harassment, discrimination, or retaliation is one too many,” the report noted.
The problems have allegedly resulted in a gradual “brain drain” at Blizzard in particular. Much of what got Blizzard to its position in the industry was its institutional knowledge; many of the developers who built series like Warcraft and Diablo were lifers at the company, and many of Blizzard’s founders had stuck around. That changed in the mid-2010s, as many of those longtime employees left the company.
In addition to the lawsuits, the ongoing cultural issues led Activision Blizzard employees to organize as the ABK Workers Alliance, in an attempt to force change at the company from the bottom up.
Separately, a series of controversial layoffs at Activision Blizzard subsidiary Raven Software led its quality-assurance department to vote to unionize in May 2022. That subsequently led to a second QA union forming at Blizzard Albany in New York.
This effectively conveyed that, for all Activision Blizzard’s money and prominence, it was and is in need of a serious, top-down reorganization.
As a first step, Microsoft signed a labor neutrality agreement with the Communications Workers of America in June 2022 to indicate it wouldn’t stand in the way of organization efforts at Activision Blizzard subsidiaries. This puts it in stark contrast with Activision Blizzard’s existing leadership, which took actively illegal steps to fight unionization drives under its roof.
What’s next
Microsoft still faces a separate regulatory challenge across the pond from the UK’s Competition and Markets Authority (CMA), which said in April that Microsoft’s proposed remedies weren’t enough to overcome cloud gaming antitrust concerns in the developing market for cloud gaming.
Microsoft President Brad Smith said on Tuesday that the company still disagrees with the CMA’s position on the case but is now “considering how the transaction might be modified” to address the UK regulator’s concerns. Microsoft, Activision, and the CMA have asked the UK’s Competition Appeal Tribunal for a stay in their litigation while they negotiate.
There is also an ongoing FTC lawsuit against Microsoft, which seeks to block its acquisition of Activision Blizzard due to concerns over monopolization.
However, that suit from the FTC raises the same objections as it did in the June hearings in San Francisco, which were dismissed in Tuesday’s ruling. It seems likely that the FTC may simply abandon the case instead of attempt to re-litigate a losing argument in a lower court.
Microsoft has made a large number of concessions to its competition in order to get the Activision Blizzard acquisition past regulators. This includes a requirement by the European Union to automatically license Activision Blizzard’s games to competing cloud gaming services.
Much like what’s happened with Minecraft, this means Microsoft has effectively stuck itself into a role of a cross-platform publisher, rather than as the owner of a platform in its own right. This is entirely in keeping with the company’s stated intentions, including what executives like CEO Satya Nadella testified during the June hearings, but is also against the typical operating procedure in the modern games industry. That strategy arguably came at the expense of the Xbox One, which got handily trounced in the marketplace by Sony’s PlayStation 4.
In addition, Microsoft disclosed in October during an investigation by the CMA that part of the driver behind the acquisition was that it plans to enter the mobile marketplace with its own standalone app store, using “well-known and popular content” like Candy Crush to draw in consumers.
With the mobile market making up just over half of the modern games industry, it was only a matter of time before Microsoft tried to establish a firmer beachhead there. This could heat things up dramatically for what’s already a competitive, occasionally controversial field, particularly if Microsoft opts to hone in on vulnerable points in the modern mobile market like its notoriously inconsistent curation.
Editor’s note: This story was updated with information about Activision Blizzard’s transparency report and other changes.
