“Those who cannot remember the past are condemned to repeat it,” the philosopher George Santayana warned 120 years ago. An even better-known philosopher, former Yankee catcher Yogi Berra, put it more succinctly: “It’s déjà vu, all over again.”
I’m referring to the antitrust battle Microsoft is waging with the US government over the company’s $69 billion agreement to buy game-maker Activision Blizzard. More than 30 years ago, Microsoft fought the feds in another antitrust suit over whether the software maker was using Windows’ monopolistic market share to kill competitors.
That one didn’t go well for Microsoft. It consumed the company’s attention for so long that it set the company adrift, setting off what is called Microsoft’s lost decade; it fell behind Apple, Google, Amazon, Facebook, and its stock price plummeted to half its previous worth.
Could the same thing happen again? Will the fight over Activision Blizzard set back Microsoft in the same way the Windows suit did? To answer that question, we need to start by taking a look at the first anti-trust battle.
The feds versus Microsoft, Round 1
In 1998, Microsoft was the tech world’s Public Enemy No. 1, thanks to Windows’ seemingly unassailable worldwide success with its monopoly in operating systems. If you wanted to reach businesses and consumers through tech, there was essentially only one way to do it: through Windows. In a world with no smartphones, tablets, or internet-connected devices, and in which Mac OS was only a rounding point in operating system market share, it was Microsoft’s way or the highway.
Microsoft aggressively took advantage of its status. The company made it exceedingly difficult for people to use any Web browser other than its own Internet Explorer. It gave its software developers working on Microsoft Office advanced looks at future generations of Windows. That killed off competition — one-time market leaders Lotus 1-2-3, WordPerfect, and Harvard Graphics — because they didn’t work with Windows as effectively as Office did.
Because of that, Microsoft founder and CEO Bill Gates was hauled before Congress in 1998 and denounced for monopolistic behavior. Shortly thereafter, the US Department of Justice and 20 state Attorneys General sued the company for using its Windows monopoly to kill its competition.
After court rulings and rounds of negotiations, in 2001 Microsoft agreed to share Windows code with other companies, and to allow non-Microsoft browsers access to Windows. It was little more than a slap on the wrist — the Justice Department had initially wanted to break up Microsoft.
But the suit still did grievous damage. The company spent all its energy on fighting court cases, and had little time and energy left for developing new products and technologies. Even though Microsoft had built a mobile operating system before Apple, the iPhone became the leader in mobile computing. Even though Bill Gates for years had talked about the importance of the internet, Google dominated the search market, Facebook the social media market, and Amazon the online retail market.
Microsoft stagnated, doing little more than rolling out new versions of Windows, often with disastrous results. It wasn’t until Satya Nadella took over as CEO in 2014 that the company regained its mojo, mainly by pivoting to the cloud.
The feds versus Microsoft, Round 2
That brings us to today. Back in January, Microsoft announced plans to buy Activision Blizzard, maker of hit games including “Call of Duty,” “World of Warcraft,” and “Candy Crush” for $68.7 billion in cash. Microsoft is already a games behemoth, with its Xbox gaming console and popular games including “Minecraft,” the “Halo” series, “Gears of War,” and others. The blockbuster move is the largest consumer-related tech deal since the purchase of Time Warner by AOL two decades ago.
Why has Microsoft bet so big on it? Gaming is extremely important to the company, bringing in more than $16 billion in its most recent fiscal year. Activision Blizzard’s blockbuster games would give that business a big jolt. In addition to the new revenue, Microsoft could also withhold Activision Blizzard games from competing gaming platforms in an attempt to turn Xbox as much a monopoly as possible.
Fear over that led the Federal Trade Commission (FTC) to sue to block the takeover. Holly Vedova, director of the FTC’s Bureau of Competition, explained the suit this way: “Microsoft has already shown that it can and will withhold content from its gaming rivals. 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.”
Microsoft, of course, disagrees and has vowed to fight the suit.
It’s not completely clear the FTC will win this one. But Microsoft can win the suit, and still end up losing, as shown in its last anti-trust showdown with the feds, by getting so distracted that it misses out on other opportunities and executes poorly on its existing business. The risk, certainly, isn’t as bad this time around, because gaming isn’t Microsoft’s core business and the company won’t devote as many resources to the legal fight as it did last time.
Still, in times of intense competitiveness and fast-changing markets and technology, taking your eye off the ball for even a short amount of time is dangerous.
There’s also a big reputational risk. Activision Blizzard isn’t run by choir boys. Far from it. The company has been sued multiple times for sexual harassment, sexual battery, and gender discrimination. The most current lawsuit, filed in October, claims: “For years, Activision Blizzard’s open ‘frat boy’ environment fostered rampant sexism, harassment and discrimination with 700 reported incidents occurring under CEO Robert Kotick’s watch. The sexual misconduct was often committed by executives and in the presence of HR.”
Microsoft has said Kotick will continue as CEO if the acquisition goes through. If the claims in the suit are true, he and his company operate in ways counter to Microsoft’s culture, this will hurt Microsoft’s reputation, which in turn will hurt its bottom line.
So, has Microsoft made a bad $69 billion bet? I think it has. Fighting the suit will distract the company at a time when the last thing it needs are distractions — and thanks to allegations of sexual harassment, it will damage the company’s brand as well. And keep in mind that once the feds have you in their cross-hairs, they keep you there for a very long time.
The last thing Microsoft needs right now is federal government watchdogs on its trail.
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