The UK’s Competition and Markets Authority (CMA) has blocked Microsoft’s proposed acquisition of US-based video game holding company Activision Blizzard over fears of stifled competition in the cloud gaming market.

What Happened?

Back in January 2022, Microsoft entered a £68.7 billion deal to buy Activision, one of the most popular video games publishers globally.

This led to the CMA launching a review of the deal in September 2022, so in February 2023, the CMA provisionally found that the merger could make Microsoft even stronger in cloud gaming, and in doing so, stifle competition in a growing market that is forecast to be worth up to £11 billion globally and £1 billion in the UK by 2026.

The provisional findings outlined concerns that the CMA had, to which Microsoft replied with remedies that offered a potential solution to the concerns. After considering Microsoft’s proposed solution, the CMA made the decision to block Microsoft’s acquisition of Activision Blizzard, saying: “The final decision to prevent the deal comes after Microsoft’s proposed solution failed to effectively address the concerns in the cloud gaming sector, outlined in the Competition and Markets Authority’s (CMA) provisional findings published in February.”

The Main Concerns

The main concerns that the CMA had/still has, which led to its decision are that :

• Microsoft already has around 60-70 per cent of global cloud gaming services plus other important strengths in cloud gaming, e.g. owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming). Acquiring Activision Blizzard would reinforce Microsoft’s already significant advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch and World of Warcraft.
• The cloud means that UK gamers can avoid buying expensive gaming consoles and PCs and have more flexibility and choice as to how they play. Allowing Microsoft an even stronger position in the cloud gaming market, which is in a rapid-growth stage, would undermine the innovation that is crucial to the development of these opportunities.
• Also, the CMA noted that, without the merger, Activision looked likely to start providing games via cloud platforms in the near future.

Shortcomings in the Remedies

The behavioural remedies submitted to the CMA by Microsoft, i.e. the ways it said it could regulate its behaviour to the point where it may be contrary to its commercial incentives in the interest of fairness (to be judged by the CMA) did not satisfy the CMA. For example, the shortcomings noted by the CMA which led to the recent decision to block the merger were:

• It didn’t fully cover different cloud gaming service business models, including multigame subscription services.
• It could have been more open to providers wanting to offer versions of games on PC operating systems other than Windows.
• It would standardise the terms and conditions on which games are available, rather than letting the developing market decide them.
• There would be a risk of disagreement and conflict between Microsoft and cloud gaming service providers due to Microsoft’s remedy only applying to a certain set of Activision games, and only streamable in a defined set of cloud gaming services if purchased in a defined set of online stores.

Essentially, the CMA thought that accepting Microsoft’s remedy would mean that regulatory oversight would be required, whereas such oversight wouldn’t be required if the merger was prevented, and market forces were simply allowed to naturally operate and shape the development of cloud gaming.

One Down – Two To Go

Although the UK’s regulator has made its decision, the merger deal also needs to be approved by regulatory bodies in the United States and European Union to go through. However, the worry is that the CMA’s ruling could have destroyed any chances of the others ruling in its favour.

Reaction

The blocking of the merger led to an initial angry reaction from Microsoft, with Microsoft’s president Brad Smith saying, “The CMA’s decision rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom” and that “this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works.”

Activision’s CEO Bobby Kotick echoed the criticism of the decision, saying, “We will reassess our growth plans for the UK” and the company said in a separate statement: “Global innovators large and small will take note that – despite all its rhetoric – the UK is clearly closed for business.”

What Does This Mean For Your Business?

Gaming market commentators have highlighted how Microsoft has invested heavily in the cloud gaming model where gaming titles are streamed rather than the customer owning them. Also, the merger would have been about securing Microsoft’s place in this future model of gaming and controlling some extremely popular games, hence the angry reaction when the UK regulator blocked the merger. However, as noted by the CMA, Microsoft is already in a very powerful position in the gaming market, thus approving the merger could have led to the need for regulation and could have stifled competition and been unwelcome news for many smaller competitors in what is a rapidly growing and changing gaming market. It has also been noted by some commentators that Sony may be particularly pleased with the decision given its opposition to the merger over how its PlayStation could have suffered restricted access to some of the world’s most popular games.

However, the matter is certainly not over yet, with Microsoft and Activision Blizzard planning to reverse the decision on appeal in the UK, plus with decisions from EU and US regulators still to come in a deal that many expected would have gone through. The outcome of these additional regulatory reviews could have significant implications for the gaming industry, Microsoft, and Activision Blizzard, as well as for businesses and consumers who rely on these platforms and services.