Finance

'Game Over' for Microsoft - How the CMA is nerfing gaming acquisitions

Microsoft's proposed acquisition of Activision has regulators globally up in arms. Pending final verdicts, why is the deal so controversial?

Khalil Gilders

04 Mar 2023 — 7 min read

Photo by kabita Darlami / Unsplash

UPDATE (March 2023): After a large meeting of Sony, Activision Blizzard, Microsoft, Nintendo, and Nvidia, executives, contracts for Nintendo and Nvidia have both been signed (10 years each) - formally giving these companies the licensing rights, allowing players access to Call of Duty through their consoles. This importantly includes for Nvidia's 'GeForce NOW' cloud-gaming service; encouraging competition for Microsoft's key rival in the cloud-gaming space. It is likely that this will be a key part of passing the merger within EU jurisdiction.

UPDATE (October 2023): Following a series of controversial back-and-forths, the CMA finally granted Microsoft approval on October 13th. The acquisition is the largest consumer technology in nearly two decades, and represents an unusual reversal from the CMA, after previously threatening to block the deal in April.

In addition to the agreement made in March, Microsoft made two further concessions for CMA approval. First, Microsoft committed to not blocking any Activision titles (including Call of Duty) from being available to rival consoles. Second, Microsoft agreed to transfer the licensing rights for cloud streaming of all past and present Activision games to Ubisoft Entertainment - a French rival game publisher - in order to ease concerns of diminished market competition.

The US FTC and UK CMA have both recently made moves to block Microsoft's planned acquisition of games developer Activision Blizzard. The $69 billion deal would see Microsoft acquire hit titles including Call of Duty, World of Warcraft, and Candy Crush. But regulators warn that the deal would hurt competition in the market, and leave gamers with fewer options.

The gaming industry is the UK's largest revenue-generating form of entertainment (bigger than music, cinema, home video, or pay TV) - generating £5 billion annually.

With the CMA's final verdict not due until April 25th, it's worth understanding where this acquisition lies in the broader legal and financial context - and why competition regulators are so up in arms about it.

Who is Activision Blizzard?

Activision Blizzard is a major American video game company, founded in 2008 after the merger of Activision, Inc. and Vivendi Games. In 2022, Activision Blizzard had a global turnover of £6.1 billion.

The company has been behind many of the biggest names in gaming, including: Call of Duty, Guitar Hero, World of Warcraft, StarCraft, Candy Crush, Skylanders, and others.

Activision Blizzard is actually the holding company for five separate business units:

Activision Publishing.
Blizzard Entertainment.
King (mobile games).
Major League Gaming (competitive gaming/eSports).
Activision Blizzard Studios (motion pictures).

All this has resulted in a multi-billion dollar business, which accounts for a sizeable portion of the video game market share.

Why does Microsoft want to acquire them?

After notifying regulatory authorities in 2022, Microsoft formally announced its intention to acquire Activision Blizzard for $68.7 billion in January 2023. Microsoft - a company who itself is known for its flagship Xbox video game consoles, among others - aims to purchase Activision Blizzard primarily for some of the titles named before, which represent a huge boost for Microsoft's revenue stream.

In particular, this includes the wildly-popular Call of Duty franchise, which is the world's best-selling video game franchise of all time.

However, many regulators have speculated that - much like their acquisition of video-game publisher, Bethesda, in 2020 - Microsoft wants to limit competition.

A key part of this is the issue of cloud-based gaming services; these are a method of playing power-hungry video games on low-end machines like the Nintendo Switch, or even your work laptop - by making use of external servers, in 'the cloud'.

Currently, Microsoft - via Xbox cloud gaming - controls a large portion of the cloud-based gaming market. If allowed to acquire Activision Blizzard in its current form, the CMA argues, it could result in Microsoft collecting 60-70% of 'global cloud gaming services'. Better control of market share would give Microsoft more leverage to raise prices on consumers (who face fewer alternatives), as well as less of a motivation to spend more to innovate and increase quality - all of which leads to supernormal profits.

Finally, however, perhaps a less bleakly-capitalist motivation is found in the Call of Duty franchise. Gamers have been complaining for the past five years that Activision Blizzard has limited access to the franchise to only the major consoles, despite innovations in cloud-based gaming. Microsoft's acquisition is posed to potentially open up the player-base of Call of Duty to Nintendo, Nvidia, Steam, and others (more on this below) - a significant benefit to gamers from across the hardware spectrum.

Who are the regulators?

All this has attracted the attention of regulatory bodies aimed at consumer protection and the ensuring of fair market competition.

In the US, the Federal Trade Commission (FTC) has filed a legal challenge to block the proposed deal, arguing that the acquisition would 'enable Microsoft to suppress competitors to its Xbox gaming consoles and... to its subscription content and cloud-gaming business'. The rapid aggression of this move comes from a wider trend that, since the Biden administration's term began, the FTC has begun a tougher campaign against 'unlawful' mergers and acquisitions (including Musk's acquisition of Twitter).

Likewise, the European Commission has opened an 'in-depth investigation' into the deal last November, and reportedly issued a formal warning to Microsoft.

Whilst pending their final verdict, the UK's Competition and Markets Authority (CMA) has released provisional findings in its investigation of the deal. The CMA is the primary body through which proposed mergers and acquisitions are reviewed. According to the CMA's own guide, it can review any mergers or acquisitions in which 'two or more enterprises cease to be distinct' - as long as either 'the UK turnover of the acquired enterprise exceeds £70 million' (or 'the two enterprises supply or acquire at least 25% of the same goods or services supplied in the UK').

The provisional findings are distinct from the final verdict (which is set to release on April 26th), and it still gives both Microsoft and Activision Blizzard a chance to address the CMA's concerns from the initial review.

Additionally, whilst the CMA is just one regulator within the UK, it has a large influence on how US-based companies operate within its jurisdiction. Previously, for instance, US company Meta (formerly Facebook) was forced to sell off Giphy, following an order from the UK watchdog in 2022.

It is notable here that it is the responsibility of the companies themselves to notify the CMA of the proposed transaction. Whilst it isn't mandatory under the 2002 Enterprise Act, it is highly encouraged - as otherwise, you risk not being able to tell your side of the positives of the transaction, as well as the CMA issuing a 'hold separate' order (which prevents any current or future integration taking place until after the verdict; previous actions can be 'unwound' but this is rarely used).

As such, the formal filing of the notification of the transaction to the CMA is a common task for teams of commercial lawyers from law firms, since it also requires a good understanding of both the specific requirements of the CMA, as well as the wider legal technicalities.

On what grounds is the deal being objected to?

Whilst many mergers can bring certain economic benefits to the economy, some have the possibility to harm competition - which, in turn, may result in reduced choices or quality for consumers, higher prices, or reduced innovation. This is usually the case when a company chooses to acquire one of its competitors, as is the case in a horizontal acquisition (which the CMA is provisionally claiming is the case here).

In its provisional findings report, the CMA states that Microsoft's proposed acquisition would be considered anticompetitive on two counts:

The status of Call of Duty: Given the close competition between Sony and Microsoft's rival hardware (the PlayStation and Xbox gaming consoles), it is likely that Microsoft would be strongly incentivised to make Activision Blizzard's Call of Duty franchise exclusive to Xbox (or make the Xbox version 'materially better... than on PlayStation').
Cloud-based gaming: Activision Blizzard's key titles could likewise be made exclusive to Microsoft's own cloud gaming platform, and so eliminate competition between Microsoft and others, including Nvidia and PlayStation.

In regards to both of these, the CMA provisionally finds that the acquisition could result in 'higher prices, reduced range, lower quality, worse service, and/or reduced innovation' in the UK gaming industry.

What's next?

When the CMA makes its final verdict on the 26th April, if it considers the transaction anticompetitive despite any concessions, it will be able to either block the transaction, or require some remedies to allow the transaction to no longer result in a substantial lessening of competition (SLC).

As part of its provisional verdict, the CMA has offered Microsoft some structural remedies to eliminate the potential SLC. These focus on the most profitable parts of Activision Blizzard (and most likely to limit choice if made exclusive). For instance, the CMA has proposed a partial divestiture of Activision Blizzard, particularly in selling off the Call of Duty or World of Warcraft games.

Microsoft, however, argues that behavioural remedies are still sufficient to eliminate any supposed SLC. These would focus on granting full, equal access to games like Call of Duty to its competitors, including Sony, Nintendo, Steam, and others.

Whilst the FTC in America seems to be ardently-opposed to the possibility of the transaction, there have been rumours that Microsoft's concessions may have swayed regulators within the EU. Whilst the CMA tends to be stricter than their continental counterparts, it is hard to believe that the UK regulator would pursue a full block of any acquisition here, particularly given the context of Activision Blizzard's direction with CoD (and instead pursue some level of remedies).

This said, the current concessions made by Microsoft (particularly over the cross-platform accessibility of Call of Duty, including on Nintendo and Sony hardware) remain only verbal promises. Given Microsoft's similar acquisition in 2020 of Bethesda (for $7.5 billion) - and proceeding to make hit titles Fallout and Skyrim Xbox-exclusive games - it is very possible that the CMA will only accept these concessions once they are legally-binding.