The Federal Trade Commission is suing Microsoft over its $69 billion deal to acquire Activision Blizzard, putting what would be the company’s largest acquisition ever in jeopardy.

In a press release issued Thursday, the FTC said the deal “would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business.”

The commission voted 3-1 to issue the complaint.

This is the biggest test yet of the FTC’s aim to rein the power of tech giants under new chair Lina Khan. It also represents Microsoft’s largest regulatory challenge since it was sued by the Department of Justice more than two decades ago over antitrust issues.

“We continue to believe that this deal will expand competition and create more opportunities for gamers and game developers,” Microsoft Vice Chair and President Brad Smith said in a statement. “We have been committed since Day One to addressing competition concerns, including by offering earlier this week proposed concessions to the FTC. While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court.”

The deal to buy Activision would vault the Redmond company into the upper echelon of video games. Activision Blizzard is the gaming giant behind such franchises as Warcraft DiabloOverwatchCall of Duty and Candy Crush.

Microsoft said on Tuesday it reached a 10-year deal with Nintendo to bring Call of Duty games to Nintendo systems if the Activision acquisition goes through. In addition, Microsoft pledged to continue releasing Call of Duty on Valve’s Steam PC game platform at the same time as it releases future installments of the blockbuster first-person shooter franchise for Xbox.

Earlier this week, Microsoft said it offered Sony a 10-year deal for equitable Call of Duty distribution on PlayStation.

Sony has opposed the acquisition, expressing concern that Microsoft might make future Call of Duty games and other big Activision titles exclusive to Microsoft Xbox.

(Microsoft Image)

In a Wall Street Journal op-ed Monday, Smith said the FTC blocking Microsoft’s acquisition “would be a huge mistake” that would “hurt competition, consumers and thousands of game developers.”

Smith used language that no Xbox exec would ever utter on stage: “Microsoft faces huge challenges in the gaming industry. Our Xbox remains in third place in console gaming, stuck behind Sony’s dominant PlayStation and the Nintendo Switch. We have no meaningful presence in the mobile game industry.”

All of this is true, but Microsoft does have a dominant presence in PC operating systems, the platform of choice for many gamers. It’s also one of the industry leaders in general cloud technology and subscription-based gaming.

The UK Competition & Markets Authority, in its initial take on the deal, expressed concern that combining Activision’s content with Xbox Game Pass “could raise barriers to entry, entrench Microsoft’s position as the leading provider of multi-game subscription services, and substantially reduce existing and potential competition.”

In its complaint, the FTC alleges that Microsoft acquires gaming content to “suppress competition from rival consoles,” pointing to its decision to make several games exclusive to Microsoft following its acquisition of Bethesda Softworks parent ZeniMax last year.

“Microsoft has already shown that it can and will withhold content from its gaming rivals,” said Holly Vedova, director of the FTC’s Bureau of Competition, in a statement Thursday. “Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”

Update: Here’s an internal email sent from Activision Blizzard CEO Bobby Kotick to employees on Thursday:

Team,

I wanted to provide a brief update on our pending merger with Microsoft. This week the U.S. Federal Trade Commission (FTC) announced its decision to challenge the deal. This means they will file a lawsuit to block the merger, and arguments will be heard by a judge.

This sounds alarming, so I want to reinforce my confidence that this deal will close. The allegation that this deal is anti-competitive doesn’t align with the facts, and we believe we’ll win this challenge.

Thanks to the hard work by all of you every day, we’re on a strong path, bringing epic joy to players around the world with what I believe are the greatest games in the industry. At the same time, the competitive landscape is shifting, and, simply put, a combined Microsoft-ABK will be good for players, good for employees, good for competition and good for the industry. Our players want choice, and this gives them exactly that. You can read more about the specifics on those points in this update we recently shared with you. 

We believe these arguments will win despite a regulatory environment focused on ideology and misconceptions about the tech industry. 

Thank you for your dedication and creativity.

Bobby

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