The CEOs of Microsoft and Activision are fighting for their $75 billion deal in a court hearing

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The CEOs behind Microsoft’s planned $75 billion acquisition of Activision made a last-ditch effort to salvage the deal in a courtroom Wednesday in the face of objections from the US government that could lead to its cancellation as early as next week.

The acquisition of the gaming company would almost certainly fall apart if the judge sided with the Federal Trade Commission, according to executives and attorneys for the companies at the San Francisco federal court hearing, which began last Thursday. The agency is seeking a preliminary injunction to stop closing the deal while it pursues a parallel case in an administrative court.

However, the evidence and cross-examination during the hearing raised the hopes of the deal’s supporters on Wall Street. Judge Jacqueline Scott Corley repeatedly urged an expert witness called by the FTC about his analysis of the deal and at one point cut off the agency’s attorney during cross-examination. She also called on a Microsoft executive to swear under oath that the company would grant Sony PlayStation a 10-year license to Activision’s most popular game, Call of duty Central issue in the case.

If the FTC loses its bid for a preliminary injunction, it will call into question the separate agency case in administrative court. Earlier this year, the agency dropped further action against Meta after it failed to obtain a preliminary injunction blocking that company’s purchase of the virtual reality game company Within.

A similar outcome in the Activision case would leave the UK’s Competition and Markets Authority as the only regulator standing in the way of a deal. Closing arguments are in the US hearing on Thursday, and the decision could come as early as Monday.

Microsoft CEO Satya Nadella used his 40-minute appearance in federal court to underscore his company’s claim that its biggest gaming competitor Sony was seeking to block the deal for competitive reasons, not because it was truly concerned about losing access to Activision titles.

Nadella said he would guarantee it was “100 percent” made by Microsoft Call of duty available on PlayStation, and that it made “neither economic nor strategic sense” to limit the game to his company’s Xbox console.

Referring to Sony’s PlayStation, he said, “The dominant player has defined competition in the market with exclusives, so this is the world we live in. I have no love for that world.”

In earlier testimony, the FTC pointed out how Microsoft made some games from another acquisition exclusive to its Xbox console, even though it previously said it would keep them widely available. She claimed that Microsoft had an incentive to do the same with Activision’s games.

In the most dramatic piece of evidence presented during the hearing, Microsoft’s attorney pointed to an email from Sony’s PlayStation chief, Jim Ryan, reassuring a colleague that the purchase of Activision likely wouldn’t result in its games becoming Xbox exclusives. In later video testimony shown during the hearing, Ryan said he changed his view after seeing the details of Microsoft’s proposed terms, while concern also grew that PlayStation customers might be left with “degraded” versions of games.

Much of the hearing has turned to technical questions about the video game market, with the FTC claiming that Microsoft will have a lot of power for high-performance game consoles powered by the Xbox and PlayStation, as well as separate markets for multi-game subscription services and cloud streaming.

By contrast, Microsoft has sought to paint itself as the third largest player in a larger console market that also includes the Nintendo Switch. Also, rather than separate marketplaces, it claims that the Game Pass subscription service is just an alternative way to pay for games, while cloud streaming is only a feature for console games.

Nadella’s challenge, the FTC attorney pointed to comments he made during an earnings call about the success of the latest Xbox console. The agency also cited his predictions about the future importance of cloud-based gaming. However, Nadella said there was little demand for video game streaming and that his definition of cloud services includes Xbox Live, which makes it possible to play with other people through the console.

In evidence presented as part of the case, a Microsoft executive identified streaming gaming as a market the company dominates.

“It is virtually impossible for anyone to launch a new video streaming service on a large scale at this point,” Matt Botti, head of Xbox Game Studios, wrote to a colleague in 2019, more than two years before the Activision deal was announced. “We are in a very unique position to spend Sony out of business,” he added.

Despite this, proponents of the deal showed mixed support for subscription-based game streaming. Activision CEO Bobby Kotick said in court that such services, which give players access to a library of games at a fixed price, “degrade the economics” of games.

Noting the toll from the Hollywood video broadcast wars, he added, “I have a general aversion to the idea.”