(Welcome to the “Most Important Story of the Week”, my bi-weekly strategy column analyzing the most important (but often not buzziest) news story of the last two weeks. I’m the Entertainment Strategy Guy, a former streaming executive who now analyzes business strategy in the entertainment industry. Subscribe here.)
You may have noticed I didn’t publish much last week. On Tuesday, I went to urgent care and I’ll save you the details, but let’s just say I spent three days in the hospital. (Thanks vestigial organs!)
The good news is I’m back and totally fine. So I’m going to try to catch up this week and next with a “Most Important Story of the Week” today, a double streaming ratings report on Friday, and then next week, it’s that time of year! Time for the “flops, bombs and misses” for the first half of 2023. (And if I have time, I might try to get to even more stuff. I owe it to you.) But next week will be big regardless.
Let’s dive right in to the story of July: the Microsoft-Activision deal. While everyone was (rightfully) talking about SAG-AFTRA—as I’ll say every issue until the dual strikes are resolved, that is the biggest story every week—this big decision snuck under the collective entertainment media industries’ radar. Since this development could arguably set the stage for more mergers & acquisitions across entertainment, it’s worth a deeper dive.
Most Important Story of the Week – Big Mergers Just Got a Yellow Light
Since the news first broke that the United States’ Federal Trade Commission (FTC) lost their case against the Microsoft-Activision merger, I’ve called it really big news. And it is. Had the FTC government won the case—and maybe future appeals—it would have had a chilling impact on future “mega-deals”, including the entertainment industry, as I wrote on the social medias and repeated on the Ankler podcast two weeks back.
But let’s not go crazy.
I’ve read other takes that verge on calling this a “green light” for future mergers. And that’s too aggressive. If anything, mergers got a “yellow light” for future deals. Future mergers will have an easier time getting approved after the Microsoft-Activision deal, but that doesn’t mean it’s a “green light” for anything-goes mergers, like say back in the 2000s.
If that sounds pretty nuanced, yeah, it is. Which means it’s time to dust off my “aggressively moderate” hat and clarify exactly what this deal did and didn’t do. And how it will impact future deals.
What Precisely Happened?
For those who don’t know, Microsoft—who now owns a few different lines of business, but one is a video game console that is morphing into a cloud gaming company—proposed to buy Activision Blizzard—the fifth largest video game developer famous for a number of popular video games, most notably the Call of Duty series and World of Warcraft—for $69 billion. This is “vertical integration”, meaning the acquirer isn’t gaining additional market share, but buying a supplier in their value chain. (Though the caveat to this is Microsoft already produces games, but will now have even more game development in-house.)
The FTC and DoJ, as part of their renewed focus on opposing mergers and acquisitions (which I’ll call “anti-consolidation” movement), sued to stop the deal, but lost in Federal court when the judge hearing the case ruled against them. (For another good take from the “anti-monopoly” crowd, Matthew Stoller had a good article here.)
A Lot Hinged on One Judge’s Decision
When the government wants to stop a merger (or break up a big company), they file a lawsuit that goes to a judge for a decision. Neither side wants a jury trial because these matters are complex, so they rely on a single judge to make a ruling. And that means that, for the government to enforce antitrust law, it often boils down to a single-point of failure.
If you’re thinking, “Wow, a lot hinges on one judge’s opinion, doesn’t it?” you’d be correct. That one judge has inordinate power to reorganize large swathes of our economy. If the government wins its case at trial, that often scuttles a deal, since the extra time required to appeal the ruling hurts the merging companies. (On the flip side, this makes actually breaking up a company, like say Microsoft in the 1990s, an even more onerous proposition.) By the way, to emphasize how capricious or arbitrary this process can be, the son of the judge overseeing and deciding this trial works at…Microsoft! And yet the judge didn’t recuse herself!
That whole analysis, though, focuses on the end of the process. Before a trial even begins, the government needs to investigate a merger, and then decide to actually go to court to stop the it in the first place. The big shift since 2021 (the start of the Biden administration) is that the US government is actually trying to stop mergers now. This is a change from even the Obama administration, which mostly shied away from major antitrust cases. The current administration has already opposed more deals than the first two years of the Obama administration and twice as many as the Trump administration.
So while it can come down to one judge deciding a merger can happen, that judge only matters if the FTC and DoJ aggressively bring cases in the first place. The Biden administration has tried to stop a host of deals, something previous administrations avoided.
The Real Question: What is the Likelihood Future Mergers Will Get Approved?
The main reason why I like the “yellow light” framing is because I’m thinking about this in probabilistic terms, imagining what the probability is that a given deal will ultimately get prevented by the government on antitrust grounds.
Go back to the Obama administration. If you imagine the world of say all potential deals—anything that could be reasonably proposed—say 90% of mergers would get approved. And it’s that high because the government only opposed the really egregious deals. An example of an “egregious deal” would be something like this: in 2011, Comcast bought NBC-Universal, but the Obama administration approved the deal with certain preconditions that Comcast had to follow to get approval. If Comcast had turned around and tried to buy Disney, the government likely would have opposed that deal and likely won. The Obama administration also successfully opposed some cell phone industry consolidation. Which was a boon for consumers and helped keep cell phone plan costs down…until T-Mobile bought Sprint. Overall the Obama administration was a “green light” on 90% of potential mergers.
By 2019, renewed antitrust enforcement was on the upswing. The Trump administration even pursued a case against AT&T that—while likely motivated by animus towards CNN—would have been a big blow for consolidation had the government won. (Again, one judge decided this merger passed muster.)
At the time, partially due to the administration’s inconsistent stances and partially due to the rising “anti-consolidation” trends, say the odds a deal would be successfully opposed lowered to 80%. (These aren’t precise numbers and aren’t something I could “prove” by the way. Just a way to think about the likelihood.) I would add, bipartisan anger at “Big Tech” helped drive anti-concentration sentiment.
Post-2021, you’d have to say the odds have dropped even further. The appointment of Lina Khan and Jonathan Kanter, to chairperson of the FTC and head of antitrust at the Department of Justice respectively, really did show a swing against merger & acquisitions and against consolidation. Say the odds dropped to 50%. That 30% is a big swing in the potential odds. But it’s legitimate. Since taking the reins of antitrust power, Khan and Kanter have aggressively investigated, opposed and litigated mergers. And as Matthew Stoller points out, while Big Tech firms get the headlines, the DoJ and FTC have had a lot of quiet victories:
But losing high profile cases matters. It is just one judge’s opinion, but it does set a tone. In addition, the FTC lost four other cases in 2022. (But had a high profile victory in their opposition to the Penguin-Simon & Schuster consolidation.)
As it is now, call it 60-70% of deals could likely still win at trial even if the government fights them. Partially this is because other judges look to other cases for precedent, and they’ll see their fellow members of the court approving deals and do the easy thing and approve their deals too. To be clear, this is just my opinion on how the odds have shifted. I’m more optimistic that antitrust enforcers will be successful than most traditional M&A lawyers, but I don’t think most corporate lawyers realize how much opinion has shifted. We’ll see.
Asymmetric Impact and What Deals “Could” Still Happen
A few weeks back, discussing the strikes, I noted that the DGA signing a deal seemed to have an “asymmetric impact”. If the DGA had gone on strike too, it really would have hurt the studios/streamers in the AMPTP. But not going on strike didn’t seem to impact the writers.
I’d say the same thing about this decision. Successfully stopping the Microsoft-Activision merger would have had a chilling impact on future entertainment deals. Getting it approved, though, doesn’t stop antitrust enforcers, especially if government prosecutors don’t care about losing at trial. (By the way, good lawyers lose court cases. If you only try court cases you can win—the slam dunks—you’re not really trying the hard cases.)
Again, it’s a yellow light for mergers. They will still face hurdles to approval, but the landscape feels slightly friendlier to mergers than it did before. (I’d add, the rise in interest rates has had likely the biggest impact on future mergers by drastically raising the costs.)
So what deals could still happen? Well, I’d be skeptical that any Big Tech deals of considerable size will go through without scrutiny. Big Tech is the villain of the moment. If Apple wants to buy Disney, I’d expect a vigorous antitrust opposition. I’d also imagine the “large” entertainment firms would have similar scrutiny, and this means Disney, Comcast and Netflix. It doesn’t mean a deal is impossible, but it wouldn’t happen be rubber stamped. Further, after the strikes this summer and the focus on the “corporatization of Hollywood”, the various labor guilds would likely be much more vocal opposing another entertainment industry merger.
That leaves the smaller firms. Could Paramount and Warner Bros Discovery pair up and avoid scrutiny? Maybe. Or maybe the very small studios (think Lionsgate or maybe Sony Pictures) could sell themselves to someone like Netflix and mostly escape scrutiny. Again, maybe. These smaller deals seem more likely to me than the giant blockbuster deals.
Oh, and one more wildcard: the 2024 election. If Biden had lost in 2020, likely, the renewed push for antitrust in the first place wouldn’t have happened.
Last Note: If You Do Oppose Corporate Consolidation, Let the FTC Know
The FTC just updated its merger guidelines document for the first time since 2022. This document isn’t case law, but is very influential both within the department and for judges interpreting U.S. case law. If you’d like to provide feedback to the FTC about how consolidation has impacted your life, you can do so here.
(You may be thinking, “But I don’t have much to say about complex antitrust issues.” Well, hypothetically, if you’re part of a worker’s guild that has seen the impact of industry consolidation, especially vertical integration, then you’re perfectly suited to comment. And yes, if I’m a union leader, I’d be heavily pushing my members to comment on these guidelines.)
Cards on the table, from a political standpoint, I support vigorous antitrust enforcement. I’ve seen some folks call this new document “anti-bigness” and I sort of hate that framing. The more accurate term is “anti-consolidation”. And the reason consolidation is bad because it means “less competition”. As a person who studies “strategy”, you can’t have strategy without competition.
If I wanted to be pejorative, I’d call the folks who are generally “pro-consolidation” the “anti-competition” crowd. If that sounds downright anti-capitalist to be “anti-competition”, yeah, it is.