Activision Blizzard's hit title Call of Duty. Photo / Supplied
British antitrust regulators on Wednesday dealt a major setback to Microsoft’s plans to acquire the video game giant Activision Blizzard for US$69 billion ($103m), blocking the proposed deal and handing a notable win to government enforcers around the world who want to rein in Big Tech.
In deciding that Microsoft’s proposals to ensure the acquisition did not harm competition “failed to effectively address the concerns in the cloud gaming sector,” a nascent part of the gaming industry, the Competition and Markets Authority inflicted a possibly fatal blow to what would be the largest consumer tech acquisition since AOL bought Time Warner two decades ago.
The surprising ruling was a clear victory for proponents of regulating tech giants like Microsoft, Amazon, Apple, Google and Meta, Facebook’s parent company. Their efforts, fueled by fears that the companies wield too much power over online commerce and communications, have been stymied in the United States by recent court losses and legislative failures.
“This is a very big win for the broader effort to realign antitrust enforcement,” said William E. Kovacic, a former chair of the Federal Trade Commission. Microsoft said it planned to appeal the ruling.
Much of the focus around whether consumers would be harmed by the deal had focused on the market for expensive gaming consoles, but the CMA in its ruling zeroed in on cloud gaming, a relatively new technology that allows people to stream games to their devices, circumventing the need for hardware like gaming consoles.
The CMA’s decision was an indication that regulators are broadening their antitrust lens to include emerging markets and are intent on helping to shape them before they can be dominated by a handful of giant companies.
The British agency’s announcement bolstered efforts by the FTC chair, Lina Khan, who has made challenging mergers a central part of her plan to rein in the tech giants. After the U.S. agency filed a lawsuit in December to block the video game deal, Microsoft swiftly tried to isolate Khan by pushing British and European authorities to reach legal settlements that would address their concerns and allow the deal to go through. Antitrust regulators in the European Union are still reviewing the acquisition and are expected to rule by May 22.
But the British officials instead signaled that an era of easy blockbuster deals by the tech giants was over. The FTC is building an antitrust case against Amazon, and Khan has said she is closely watching whether the tech giants will abuse their power in the race to develop artificial intelligence tools.
On Wednesday, the FTC said it was aligned with the British regulator. “We also have concerns, as explained in our complaint, about the anticompetitive effects of this deal,” Holly Vedova, the director of the agency’s Bureau of Competition, said in a statement.
Microsoft has said it wants to close the Activision acquisition by July 18. If its appeal fails, the company would probably have to walk away and pay a US$3 billion breakup fee to Activision, bringing an end to what would have been one of the biggest shake-ups to the gaming industry in decades.
“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,” Brad Smith, Microsoft’s president, said in a statement.
Activision, the publisher of blockbuster games like Call of Duty, said it would “work aggressively” with Microsoft to reverse the ruling.
“If the CMA’s decision holds, it would stifle investment, competition and job creation throughout the U.K. gaming industry,” said Bobby Kotick, Activision’s CEO.
Activision’s stock fell more than 11per cent in midday trading. Shares of Microsoft, which were trading higher after it reported stronger-than-expected earnings Tuesday, were up about 8per cent.
Microsoft announced the deal to buy Activision early last year, hoping to combine Microsoft’s Xbox console and video game subscription service with Activision’s blockbuster games like Call of Duty, World of Warcraft and Candy Crush.
At the time, Activision was reeling from a California lawsuit accusing it of fostering a toxic, sexist workplace culture, and Kotick faced calls to resign.
For more than a year, the debate over the deal largely centered on what would happen to the hundreds of millions of people who play Activision’s games. The company that opposed the deal the most vocally was Sony, which makes the PlayStation console, a competitor to Microsoft’s Xbox. Sony argued that fans of Call of Duty and other Activision titles who can currently play the games on the Xbox or PlayStation would be forced to use Microsoft’s consoles and services exclusively.
Sony declined to comment on the ruling.
Microsoft said it would not restrict Call of Duty to the Xbox, and it argued the acquisition would actually give more people access to the games. It focused on reaching settlements with regulators outside the United States that would allow the deal to go through with some conditions. It also offered gaming platforms guaranteed access to Call of Duty in an effort to show it would not restrict the popular game on other consoles.
The British regulator initially said in February that the deal would hurt competition for gaming consoles like the PlayStation and the nascent cloud gaming industry, which involves harnessing the power of remote data centers to stream a game to a device like an iPhone or computer. But in late March, it reversed course and said that it no longer believed the deal posed a threat to Sony, which seemed to put Microsoft in a strong position.
Instead, the CMA focused on the cloud gaming market, which has been around for just a few years, and focused on the possibility that cloud gaming could explode in popularity, eventually being worth US$1.3 billion in Britain and US$14 billion globally by 2026.
“The cloud allows U.K. gamers to avoid buying expensive gaming consoles and PCs and gives them much more flexibility and choice as to how they play,” the CMA wrote in its ruling Wednesday. “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.”
In the future, cloud gaming could untether gamers from consoles and shift the focus from hardware to technology that allows games to be streamed from remote data centers. Paired with Xbox Game Pass, Microsoft’s monthly game subscription service that has more than 25 million subscribers, it could be a powerful tool. But it has not yet been widely adopted, and early forays into cloud gaming from companies like Microsoft, Google and Amazon have struggled. The technology still encounters frequent glitches and requires a strong Wi-Fi connection.
“Cloud gaming longer term could be very big, but it would require a massive shift in how games are made and sold,” said David Gibson, a senior analyst for MST Financial, a financial services company based in Australia.
In recent months, Microsoft signed a number of deals promising it would allow Activision’s games to be played for 10 years on cloud streaming platforms, such as Nvidia’s GeForce Now streaming service. But the CMA said those solutions did not cover enough cloud business models.
The agency said that Microsoft already had a significant edge as cloud gaming gained prominence, accounting for 60per cent to 70per cent of cloud gaming services worldwide. The CMA said if the deal closed, Microsoft was likely to benefit from making Activision’s games exclusive to its own cloud gaming platform, called Xbox Cloud Gaming, which could harm consumers.
“This deal would strengthen that advantage giving it the ability to undermine new and innovative competitors,” Martin Coleman, the chair of a panel that conducted an investigation for the CMA, said in a statement.
The appeals process is likely to be relatively swift, but Microsoft will have to meet a high bar: The tribunal that oversees appeals looks mainly at whether the CMA’s ruling was reached lawfully and reasonably, according to Pablo Ibáñez Colomo, a professor of law at the London School of Economics.
“This is a significant blow to the deal completing,” said Piers Harding-Rolls, a gaming researcher at the analytics firm Ampere Analysis in London. “Inevitably this will delay things and will impact Xbox’s commercial plans.”
Written by: David McCabe and Kellen Browning
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