UK Regulator Blocks Microsoft’s Activision Blizzard Acquisition VGC

Microsoft’s proposed acquisition of Activision Blizzard has been blocked by the UK’s Competition and Markets Authority (CMA).

After months of investigation, the regulator published its final report on the $69 billion deal on Wednesday, saying it was put on hold over concerns it would “alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for UK gamers in the coming years.” .”

The decision is one of the most important yet in Microsoft’s battle for acquisitions in line. UK regulators are seen as the most influential in determining the future of deals with the EU and the US.

In the US, the Federal Trade Commission is suing Microsoft to block the deal over competition concerns. The EU is still investigating.

Microsoft has confirmed it will appeal the CMA’s decision.

The UK regulator wrote: “The CMA has blocked Microsoft’s proposed purchase of Activision over concerns that the deal would change the future of the fast-growing cloud gaming market, leading to less innovation and less choice for UK gamers in the coming years.

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“Microsoft has a strong position in cloud gaming services and the evidence available to the CMA shows that Microsoft would find it commercially advantageous to make Activision’s games exclusive to its own cloud gaming service.

“Microsoft already has an estimated 60-70% share of global cloud gaming services and has other significant strengths in cloud gaming by owning Xbox, the leading PC operating system (Windows) and global cloud computing infrastructure (Azure and Xbox Cloud Gaming).

“This deal will strengthen Microsoft’s advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch and World of Warcraft. Evidence available to the CMA suggests that, absent a merger, Activision will begin providing games through cloud platforms in the near future.

“The cloud allows UK gamers to avoid buying expensive gaming consoles and PCs and gives them more flexibility and choice in how they play. Allowing Microsoft to take such a strong position in the cloud gaming market as it begins to grow quickly would risk undermining the innovation critical to the growth of these opportunities.

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In a statement, Microsoft president Brad Smith said the company was “disappointed” by the CMA’s decision and claimed it would appeal.

“We are fully committed to this acquisition and will appeal. The CMA’s decision rejects a practical way to address competition concerns and discourages technology innovation and investment in the United Kingdom.

“We have already signed agreements to make Activision Blizzard’s popular games available on 150 million more devices, and we are committed to strengthening these agreements through regulatory remedies. We are particularly disappointed that, after lengthy deliberation, this decision reflects a flawed understanding of this market and how related cloud technologies actually work.

UK regulators have blocked Microsoft's acquisition of Activision Blizzard

Activision said it would work with Microsoft on the appeal and criticized the CMA for calling it “disrespectful to UK citizens”.

“The CMA’s report today is a major blow to the UK’s ambitions to become a tech hub, and we will work with Microsoft to reverse this on appeal,” it said.

“This report is also unfair to UK citizens, who are facing increasingly dire economic prospects and will need to reassess our growth strategy in the UK. Global explorers big and small will note that – despite all its rhetoric – the UK is closed for business.

In a separate statement, Activision Blizzard CEO Bobby Kotick stressed that Wednesday’s decision was “far from the final word on this deal.”

Initially, it appeared that the UK regulator was moving towards approving the deal ahead of today’s announcement.

While the CMA provisionally found in February that the merger could reduce competition and “result in higher prices, fewer choices or less innovation for UK gamers,” it partially reversed its decision a month later.

After reviewing the new evidence, the CMA said it no longer believed the deal would significantly reduce competition in the console gaming space, although it still had concerns about the acquisition’s impact on the cloud gaming market.

In its ruling published on Wednesday, the regulator said its final decision came after Microsoft’s proposed solution “failed to effectively address the concerns of the cloud gaming sector”.

To address regulatory concerns, earlier this year Microsoft inked game distribution deals with several cloud gaming services, including GeForce Now, Boosteroid, and Ubitus.

Microsoft submitted a proposal to address some of these concerns that the CMA examined in great depth. The proposed remedy sets out requirements for which games Microsoft must offer on which platforms and on what terms over a ten-year period.

Such measures are described as ‘behavioural’ because they seek to regulate the conduct of the businesses involved in the merger, requiring them to behave in ways that may be contrary to their commercial incentives. This therefore takes the form of ongoing regulation of the sector, changing market forces in a growing and dynamic market with mandatory regulatory obligations ultimately overseen, and enforced by the CMA – in this case globally.

Microsoft’s proposal has a number of significant drawbacks related to the growing and fast-moving nature of cloud gaming services:

  • It does not adequately cover the various cloud gaming service business models, including multigame subscription services.
  • It was not open enough to providers who wanted to offer versions of games on PC operating systems other than Windows.
  • It will standardize the terms and conditions on which games are available, as they are determined by the dynamics and creativity of competition in the market, as would be expected in the absence of a merger.

Given that the remedy applies only to a defined set of Activision games, which can only be streamed in a defined set of cloud gaming services, provided that they are purchased in a defined set of online stores, there are significant risks of disagreement and conflict between Microsoft and Cloud gaming service providers, especially in a rapidly changing market over ten years.

Acceptance of Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA. Conversely, preventing mergers would effectively allow market forces to continue to govern and shape the development of cloud gaming without this regulatory intervention.

Martin Coleman, chairman of the independent panel of experts who carried out the inquiry, said: “Gaming is the UK’s largest entertainment sector. Cloud gaming is growing rapidly with the potential to transform gaming by changing the way games are played, freeing people from the need to rely on expensive consoles and gaming PCs and giving them more choice over how and where they play games. This means that it is imperative that we protect competition in this emerging and exciting market.

“Microsoft already enjoys a powerful position and head start over other competitors in cloud gaming and this deal will strengthen that advantage giving it the ability to undermine new and innovative competitors.

“Microsoft engaged constructively with us to try to resolve these issues and we are grateful for that, but their proposals were not effective in addressing our concerns and would have replaced competition with ineffective regulation in a new and dynamic market.

“Cloud gaming needs a free, competitive market to drive innovation and choice. This is best achieved by allowing the current competitive dynamics in cloud gaming to continue to operate.

The European Commission will publish its ruling on the proposed acquisition by May 22. It has been claimed that Microsoft’s willingness to offer game licensing deals to rivals is likely to address EU antitrust concerns.