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The Competition and Markets Authority (CMA) has blocked Microsoft's proposed acquisition of Activision Blizzard Inc (Activision) for £68.7 billion – following an in-depth investigation, given concerns over the deal's impact on the UK cloud gaming market.
In our previous article, Goodbye to Call of Duty? The War on Competition, we explored the competition concerns over the deal, giving Microsoft control over important gaming content such as Call of Duty (CoD), Overwatch and World of Warcraft.
Since September 2022, the CMA and other competition authorities in the EU and US have been investigating the proposed deal to assess the risk it poses to competition.
Competition benefits consumers because it forces businesses to innovate new products and services and lower their prices.
In the console gaming market, Microsoft's largest competitor of its Xbox console is Sony's PlayStation console.
Microsoft is, however, the leading name in cloud gaming. Microsoft accounts for an estimated 60-70% of global cloud gaming services, the leading PC operating system (Windows) and global cloud computing infrastructure via Azure and Xbox Cloud Gaming.
The CMA previously flagged its two main concerns with the deal.
First, Microsoft having a monopoly over the console market by leveraging CoD's availability on Xbox, and secondly (and of more concern to the CMA), the impact which the deal will have on the cloud gaming sector.
The latter is the basis on which the CMA has blocked the deal.
By acquiring Activision's gaming portfolio, Microsoft looks to strengthen its position in the future gaming market.
Cloud gaming is an exciting, rapidly growing sector, which is forecast to be worth up to £11 billion globally and £1 billion in the UK by 2026 – nearly equal to sales of recorded music in the UK in 2021.
In the past, the gaming market was dictated by the games console, through which players would buy games to play on that console.
Nowadays, there is a distinct movement towards cloud gaming, which operates similarly to streaming services for television, where you pay for a subscription on an ongoing basis and stream gaming titles rather than owning them outright.
Microsoft currently offers this service via its subscription service, Xbox Game Pass.
Cloud gaming allows UK gamers to avoid buying expensive consoles and gaming PCs and therefore offers more flexibility, choice and cheaper alternatives for playing games.
Following the CMA's initial published concerns over the deal, Microsoft alleviated these concerns.
One such step was entering into an agreement with global cloud gaming provider Nvidia to allow all Xbox games and Activision titles playable on PC to be offered on its GeForce Now service.
Microsoft also signed a deal with Ukrainian cloud gaming platform Boosteroid and cloud streaming enabler Ubitus (who power several Nintendo Switch cloud games, such as Resident Evil 7 and Assassin's Creed Odyssey).
However, these steps have been deemed ineffective by the CMA.
Microsoft prepared a proposal to rebut the CMA's concerns, which set out requirements governing which of its games would be offered to certain platforms by Microsoft and the conditions under which these games would be available over ten years.
The CMA found the following shortcomings with Microsoft's proposal:
In short, under the proposal, Microsoft may still be able to exert pressure on the market by forcing gamers to acquire the rights to play the games through certain stores or via a subscription to a certain service.
Additional concerns include in-app purchases or cloud providers not being able to provide access to these games in rival multi-game subscription services or offer these games on computer operating systems other than Windows.
If Microsoft limits support to Windows (i.e. cloud providers have to license Windows to run CoD), then competition would be stifled as cloud gaming service providers would be forced to become customers of Microsoft.
Currently, Valve's StreamOS (operating on Linux) is the only realistic threat to Window's dominance, but if cloud providers are forced to license Windows, it seems unlikely that there would be a mass take-up of Linux (and could reflect the failed push of Stadia cloud gaming).
Additionally, while there would be the benefit of having Activision's content available on Microsoft's Game Pass, the CMA felt that the potential harm outweighed the benefits.
For example, Microsoft taking the likely commercial decision to increase the cost of a Game Pass subscription following the deal to account for the added value of the Activision games (which it would be able to do due to the value of CoD and the rest of the Activision portfolio to gamers).
Another shortcoming of Microsoft's proposal lay in the rapidly changing and fast-developing nature of the cloud gaming market.
The remedy only applies to a certain set of Activision games, to be streamed in a defined set of cloud gaming services after purchase in a defined set of online stores - in short, it was unlikely the proposal would still be appropriate or applicable in five years, let alone ten.
While the decision surprised many by blocking the deal, the CMA leaves the gaming market, particularly the cloud gaming market, to be shaped freely by market forces and competition between businesses within this sector.
By contrast, Microsoft's proposal required regulatory oversight and intervention within the market for the next decade.
To proceed, the deal must be approved by the CMA and the regulators in the EU and the USA.
The European Commission has delayed making its final decision until 22 May 2023 but has indicated that it may look favourably on the deal following Microsoft's licensing deals with Nvidia and Nintendo.
On the other hand, the Federal Trade Commission originally raised competition concerns in 2022 over the reduction of competition and creation of monopolies for gaming subscription services, cloud gaming and high-performance consoles, mirroring the earlier, more wide-ranging concerns of the CMA.
Its investigation is still at an early stage, and a hearing is scheduled for 2 August 2023 to review evidence of the anti-trust risk in the US market.
Microsoft and Activision have already announced their intention to appeal the decision by the CMA; however, this is often a lengthy process of several months, and the CMA has won the majority of appeal cases brought against it.
To bring an appeal, Microsoft must file a notice with the Competition Appeal Tribunal and convince a panel of judges that the CMA has acted irrationally, illegally, or with procedural impropriety or unfairness.
If Microsoft wins its appeal, the deal returns to the CMA for review once more, and given the concerns expressed in its decision to block the deal, it seems unlikely the CMA would change its mind to be in favour.
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