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UK Rejects Microsoft’s Proposed $69B Deal with Activision Blizzard

Losing a major regulatory battle in securing the deal

Yesterday, the UK’s Competition and Markets Authority slammed the door shut on Microsoft’s proposed $69 billion deal to acquire gaming developer Activision Blizzard, rejecting the deal as anticompetitive. The CMA began an in-depth review of the deal last September. In February, the CMA made an initial ruling against the deal, but said they were willing to listen to possible remedies to address antitrust concerns. In yesterday’s announcement, the CMA said that Microsoft’s proposed solution did not sufficiently address their concerns that the merger would stifle competition in the cloud gaming market.

CMA’s concerns

In its review of the deal originally proposed in January 2022, the CMA said the UK cloud gaming market was growing rapidly, tripling the number of monthly active users from the start of 2021 to the end of 2022. The industry is projected to be worth £11 billion globally and £1 billion in the UK by 2026. Microsoft currently accounts for 60% to 70% of global cloud gaming services with Xbox, Windows and Azure to support their gaming infrastructure.

“The deal would reinforce Microsoft’s advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch, and World of Warcraft. The evidence available to the CMA indicates that, absent the merger, Activision would start providing games via cloud platforms in the foreseeable future,” the CMA wrote.

“The cloud allows UK gamers to avoid buying expensive gaming consoles and PCs and gives them much more flexibility and choice as to how they play. Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities,” added the CMA.

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Microsoft’s proposed solution

To address the CMA’s concerns, Microsoft proposed requirements about which games Microsoft could offer on what platforms and under what conditions over a ten-year period. For example, in February, Microsoft signed a tentative 10-year deal with Nintendo to allow Nintendo players to get new Call of Duty games the same day Xbox players got them. The deal was contingent upon regulatory approval.

The CMA said the proposed remedy was “behavioral” in nature and did not adequately address their concerns. Specifically, the CMA said:

  • The proposed solution did not sufficiently cover different cloud gaming service business models including multigame subscription services.
  • The remedy was not sufficiently open to providers who might want to offer versions of games on PC operating systems that aren’t Windows-based.
  • Microsoft would standardize the terms and conditions under which the games would be available, rather than letting the market determine them.
  • The remedy applied only to specific Activision games, creating “significant risks of disagreement and conflict between Microsoft and cloud gaming service providers.”
  • If the CMA accepted the proposed merger, some regulatory oversight would be required of the CMA. By contrast, if the CMA rejected the merger, the market would help to shape the development of cloud gaming without CMA intervention.
Gaming console and controller for Xbox One
Source: Envato Elements

CMA statement

Ultimately, the CMA decided that the possible benefits of the merger did not outweigh the harm they felt the merger would create. Martin Coleman, chair of the independent panel of experts who conducted the investigation, said it was important that they protect competition as the cloud gaming market evolves. He also said that appreciated that Microsoft “engaged constructively” with them to try to address their concerns, but it was not enough to sway them in Microsoft’s favor.

“Microsoft already enjoys a powerful position and head start over other competitors in cloud gaming and this deal would strengthen that advantage giving it the ability to undermine new and innovative competitors,” Coleman said. “Cloud gaming needs a free, competitive market to drive innovation and choice. That is best achieved by allowing the current competitive dynamics in cloud gaming to continue to do their job.”

Microsoft rebuttal

In a statement issued Wednesday and shared by GeekWire, Microsoft president CEO Brad Smith said, “The CMA’s decision rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom.”

“We’re especially disappointed that after lengthy deliberations, this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works,” Smith said.

Insider Take

This is another major blow to Microsoft’s goal of acquiring Activision Blizzard in an all-cash deal. In December, the Federal Trade Commission also tried to block the deal, fearing that Microsoft would monopolize the gaming console and subscription gaming markets. Ironically, The New York Post reported on Tuesday that Microsoft was optimistic they would receive approval this week from the UK and final approval from the EU next month. It will be interesting to see if the CMA’s decision will impact possible approvals from the EU and the FTC. We don’t see the FTC backing down, though it will have to jump through legal hoops to get a temporary injunction to stop the merger.

Copyright © 2023 Authority Media Network, LLC. All rights reserved. Reproduction without permission is prohibited.

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