The UK doesn’t want Microsoft’s Activision

Norman Ray

Global Courant 2023-05-01 17:30:56

Microsoft is furious. Last week, a surprise decision from the UK’s Competition and Markets Authority (CMA) left its $68.7 billion deal to acquire Activision Blizzard blocked in Britain, thanks to concerns about the future of cloud gaming.

Microsoft president Brad Smith was awake at 2AM that morning hastily writing a response from across the pond, according to Bloomberg. h spoke to the BBC a day later and called the UK regulator’s decision the “darkest day” for Microsoft in its four decades of working in Britain. He went a step further and said “the European Union is a more attractive place to start a business” than the UK, a particularly stinging statement given the political issues around Brexit.

Now, Microsoft is bruised, angry, and plotting its next move. If Brad Smith’s fighting talk is anything to go by, Microsoft will try to keep this deal alive. But the CMA’s decision won’t be an easy one to appeal.

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Microsoft president Brad Smith has previously appeared in Brussels to argue for its Activision deal.

UK regulators have been cracking down on merger and acquisition activity in recent years, coinciding with the UK’s exit from the European Union. To fight its latest decision, Microsoft will have to file a notice with the Competition Appeal Tribunal (CAT), a process that can take months. It will have to convince a panel of judges that the CMA acted irrationally, illegally, or with procedural impropriety or unfairness. And the chances of winning are slim. “The CMA has won 67 percent of all merger appeals since 2010,” wrote Nicole Kara partner at the Linklaters law firm, in 2020. I spoke to Kar after the CMA’s Microsoft decision, and she confirmed the CMA still wins the majority of any appeals.

Meta’s battle with the CMA over its Giphy acquisition shows what Microsoft might be in store for. Meta was originally ordered to sell Giphy in 2021 but appealed the ruling and was unsuccessful. Meta eventually had to comply with the UK competition watchdog and divest itself of the social media GIF library Giphy. Viagogo’s $4 billion takeover of StubHub was also partially blocked by the CMA, forcing the company to keep StubHub’s US and Canadian operations but sell its UK and international businesses.

Microsoft skirmished with the CMA during the review process, publicly criticizing the regulator’s math and forcing it to fix “clear errors” in its financial calculations around withholding Call of Duty from PlayStation.

Those errors forced the CMA to make a rare U-turn with its provisional findings, dropping concerns around Call of Duty and the impact of Microsoft’s deal on console competition. But crucially, it kept cloud gaming concerns open — which led to the deal being blocked. Sony, which has emerged as one of the main opponents (alongside Google) to Microsoft’s Activision acquisition, called the CMA’s initial U-turn a “surprising, unprecedented, and irrational” decision, but the PlayStation maker has not yet commented on the regulator’s decision to block the deal.

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The CMA said in September that it was concerned about the effects of Microsoft owning Activision Blizzard games on existing rivals and emerging entrants offering multi-game subscriptions and cloud gaming services. I tweeted at the time that all of the headlines around Call of Duty were just noise, and there would be bigger concerns around Microsoft’s ability to leverage Windows and Azure, unlike its competitors, and how it could influence game distribution and revenue shares across the game industry with its Xbox Game Pass subscription.

Call of Duty wasn’t a big concern for the CMA after all. Image: Activision Blizzard

Microsoft knew cloud gaming would be a key concern, and that’s why it has spent the past couple of months preparing by signing deals with Boosteroid, Ubitus, and Nvidia to allow Xbox PC games to run on rival cloud gaming services. These 10-year deals will also include access to Call of Duty and other Activision Blizzard games if Microsoft’s deal is approved by regulators. If it’s not approved, then the deals are off for Activision games, with only access to Microsoft’s Xbox PC games being supplied.

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But these deals haven’t convinced the UK. The CMA says they are “too limited in scope” with models that mean gamers have to acquire the right to play games “by purchasing them on certain stores or subscribing to certain services.” There’s also concern around Microsoft potentially retaining all revenue from sales of Activision games and in-app purchases or cloud providers not being able to provide access to these games in rival multi-game subscription services or offer them on computer operating systems other than Windows.

Limiting support to Windows would make rival cloud gaming services customers of Microsoft, helping the software giant secure its dominance in operating systems if there ever was a bigger shift to cloud gaming. Valve’s SteamOS provides the only realistic threat to Windows gaming dominance right now, and if cloud providers have to license Windows to run games like Call of Duty, then it’s unlikely that we’ll see the switch to Linux that Google tried to push with its failed Stadia cloud gaming service.

Most of this deal now rests on the European Union’s shoulders. The cloud deals Microsoft has signed are also designed to appease regulators in the EU. Reuters reported last month that the Activision deal is likely to be approved by EU regulators following the Nvidia and Nintendo licensing agreements. The EU is due to make a decision by May 22nd, and Microsoft is once again trying to get out ahead of regulators by signing a fresh deal with European cloud gaming platform Nware. Nvidia and Boosteroid, which both signed Microsoft’s 10-year cloud deal, have publicly questioned the CMA’s decision, with Microsoft hoping this kind of backing will sway EU regulators.

An EU approval could offer a glimmer of hope for Microsoft’s giant deal, as such a move would put pressure on the UK as the only major market to outright block the acquisition. Regulators in Saudi Arabia, Brazil, Chile, Serbia, Japan, and South Africa have already approved the deal. Microsoft does face trouble closer to home, though.

In the US, the Federal Trade Commission sued to block Microsoft and Activision Blizzard’s late last year deal. The FTC case is still at the document discovery stage, with an evidentiary hearing scheduled for August 2nd. Microsoft and Sony lawyers are already arguing over which (and how many) documents should be presented as part of the legal discovery process, and we’re months away from knowing how the case will proceed.

Microsoft has always maintained that the deal will close by the end of its fiscal year 2023, which is the end of June. But that deadline looks incredibly unrealistic now, given the CMA’s intervention. We’re definitely going to see some fighting from Microsoft in the weeks ahead, but if EU regulators share the same concerns as the CMA, then it will almost certainly be game over for Microsoft. It’s hard to imagine it’s really willing to fight it out in courts for months or years with multiple regulators in Europe, all while facing the prospect of the FTC trying to break the deal apart. So for the next few weeks, all eyes are now on Brussels.


The UK doesn’t want Microsoft’s Activision

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