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18 May 2023

Microsoft battles UK CMA, wins EU clearance for Activision acquisition

Microsoft will be hitting the aspirin, trying to clear the regulatory headaches related to its attempted purchase of Activision Blizzard. The EU has now given the deal the green light, but the UK’s Competition and Markets Authority has upset the apple cart, and blocked the deal.

That UK decision has baffled industry watchers. The CMA is a quasi-independent organization, although its leadership is appointed by the UK Business Secretary – as well as its entire budget. Members of the current Conservative government have asked what the CMA’s decision means for companies looking to invest in the country, and the government does appear to have the ability to directly intervene and reverse CMA decisions, if needed.

The UK’s economy has underperformed since the 2008 financial crisis, and outlooks have been hampered by Brexit and Covid. Attracting overseas investment has been a long-term objective, and being so out of step with the rest of the world does not help land billion-dollar deals.

Back in September, the first hints that the CMA would be a stumbling block were identified. It declined to approve the deal on its fast-track program, citing concerns that the deal might harm the “nascent market for cloud computing services.” Crucially, it failed to specify how it arrived at this conclusion, and the evidence for this belief, and therefore Microsoft could not deliver the required proposals for the CMA’s stated concerns.

In that September summary, the CMA pointed to the combination of the Xbox console platform, the Windows operating system, and Microsoft’s Azure cloud computing platform, as “a combination of assets that is difficult for other cloud gaming service providers to match.”

This position, on the face of it, seems reasonable, but is easily countered by pointing to the availability of AWS and Google Cloud Platform for cloud games services, or to Nvidia’s GeForce Now service, or the small pile of independent cloud gaming providers.

However, a later point seems to betray the depth of the CMA’s technical understanding. “By having Windows, the OS where the vast majority of PC games are played, Microsoft can stream games to Windows PCs without having to pay an expensive Windows licensing fee.”

This position implies that Windows itself is a barrier for competitors – that Microsoft can attempt to use the Windows license fee to block rivals like Sony or Nintendo out from the platform. Unfortunately, that isn’t how Windows works, and license fees are currently paid for by the PC manufacturers or purchased by a self-builder.

They are one-offs, and are not a rolling subscription, so cannot be a paywall brought up to block a rival streaming service. Worse, if you then look at Apple’s macOS, you then get into questions of hardware restrictions and the tie of the operating system to exclusive hardware, which is another can of worms.

While the Steam Deck portable console has birthed a renaissance for Linux-based gaming, Linux fanboys cannot post smugly from their gaming chairs. Currently, all that is needed to stream a cloud-based video game is a web browser and a controller. Browsers are wonderfully available, across all configurations.

Cloud-gaming is perhaps the most cross-platform option for video games, and so the angle that the CMA should be pursuing is the combination of intellectual property – as content would truly be king in a world where hardware parity has been reached.

Unfortunately, the CMA is instead pursuing Windows license nonsense. It does not seem to consider how the same games could be streamed on both the mobile platforms, on the game consoles too, as well as PCs running Windows, macOS, or Linux. Worse, there is no mention of set top boxes, connected TV devices, or smart TVs.

Put simply, cloud gaming would enable nearly any screen capable of streaming video at a low enough latency to become a target for cloud gaming services. These services just have to secure the supporting infrastructure, in a fairly competitive cloud computing market, and then negotiate game availability with the publishers.

This would move beyond the need for powerful local computing, which the in-house publishers from Microsoft, Sony, and Nintendo do currently get to leverage. The anticompetitive concern that feels valid to make, once cloud gaming has actually become a substantive presence in the overall gaming market, is the ability for the likes of Microsoft to block The Elder Scrolls VI from appearing on anything but its own cloud gaming platform.

However, that is a speculative concern, and not one that stands up to much scrutiny, given the current landscape. Speculative fears, after all, should have blocked most if not all multi-billion acquisitions – as market power should lead to market distortions and consumer harm, in the logical conclusion.

Sure, in ten years, when you cannot purchase a standalone perpetual license to a game, and therefore have to subscribe to a cloud service in order to play one, we should be fearful of platform exclusivity. However, the refutation at that stage will simply be to gesture towards the video streaming services, which thrive on the exclusivity of their titles. That debate will get much spicier once physical media sales for shows and movies are finally abandoned.

Currently, it looks like Microsoft will win an appeal via the Competition Appeal Tribunal (CAT), which notably slapped a CMA decision against Apple down recently due to the CMA forgetting that it was outside the statutory limits of its own decisions. This suggests that the CMA is not firing on all cylinders, as procedural errors should really be beneath a national regulator.

The $68.7 billion deal was announced in January 2022. At the time, Faultline noted that Microsoft was likely to cull most of the Activision Blizzard leadership and corporate structure, due to its ongoing set of controversies and lawsuits. It was clear that the deal would face scrutiny, as in the US, it appeared that the regulators were tiring of ‘big tech’s’ appetite for acquisitions.

This was especially so because Microsoft had apparently gotten away with purchasing ZeniMax for $7.5 billion, in September 2020, without any scrutiny. That deal, however, did lead to a limp FTC complaint, filed in December 2022, after the Activision Blizzard deal’s ramifications had been considered.

We expressed doubts that Microsoft would be so daft as to try to squeeze Sony and Nintendo via making Activision Blizzard titles exclusive to the Xbox platform, and Microsoft has been on a blitz on that front, trying to reassure regulators that it was committed to cross-platform titles. It even offered a 10-year decree with the FTC, to this end.

Despite Microsoft’s size, it sits in fourth place in the game publishing world. The $68.7 billion acquisition would add sixth-place Activision Blizzard to the realm, and jump the combined entity into second place, behind Sony.

The EU pointed to Microsoft’s recent licensing commitments, in its decision, saying they have helped to ease anticompetition concerns. The deal now has clearance in 37 countries, which far outsize the UK in both population and market value. As the CMA’s case looks weak, it appears that the UK is set for another embarrassment on the world stage, if (when) Microsoft wins out.