UK blocks Microsoft’s planned $68.7B Activision bid, saying it would ‘substantially weaken competition’

The U.K.’s Competition and Markets Authority (CMA) has confirmed that it intends to block Microsoft’s megabucks Activision acquisition, concluding that such a merger would create “…the most powerful operator” in the cloud gaming market.

The CMA noted that with Microsoft’s current share of 60-70% of the U.K. cloud gaming market, acquiring Activision’s portfolio of games would “substantially weaken competition.” It added that Microsoft would also have the incentive to withhold such games from competing gaming platforms.

The story so far

By way of a brief recap, Microsoft first revealed plans to buy Activision in a whopping $68.7 billion deal last January, a move that would essentially make Microsoft the third-largest gaming company in the world by revenue behind Tencent and Sony, while giving it direct control over mega-franchises such as Call of Duty and World of Warcraft.

Last July, the CMA confirmed it was launching an antitrust investigation into the deal, then two months ago the regulator gave the strongest indication yet that it was gearing up to block the merger when it provisionally concluded it “could harm U.K. gamers” by creating higher prices, fewer choices, and less innovation. Then last month, the CMA narrowed its position to focus entirely on cloud gaming, rather than console gaming.

This is a position that the CMA has confirmed today, noting that while Microsoft could damage its closest competitor in the console market by withholding Call of Duty from Sony’s PlayStation, it believed that Microsoft would be “unlikely to do so.” It said this was because PlayStation has a “large and profitable user base that regularly buys Call of Duty,” and that losses from reduced sales to PlayStation users would outweigh any gains Microsoft were to attain from gamers switching to Xbox.

With cloud gaming, however, the CMA notes that Microsoft’s market advantage owing to the proliferation of Windows and its “significant cloud infrastructure” businesses would give it a strong foundation on which to gain an unfair advantage if it were to acquire Activision Blizzard’s titles.

“No other cloud gaming operator has this combination of advantages,” the CMA wrote. “Some of these strengths are already reflected in Microsoft’s current UK market share of cloud gaming of between 60-70%.”

Appeal

Microsoft vice chair and president Brad Smith issued a statement immediately after the CMA published its final position today, saying that Microsoft intends to appeal the decision while pointing to recent moves it has made to alleviate competition concerns, which includes signing deals that would make Activision Blizzard games available on rival devices. Smith wrote:

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

We have already signed contracts to make Activision Blizzard’s popular games available on 150 million more devices, and we remain committed to reinforcing these agreements through regulatory remedies.

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, Vice Chair and President

Indeed, Microsoft has made various commitments toward keeping Activision games on rival platforms including Sony, Nintendo, and Steam for a 10-year period. However, the CMA has taken the position that Microsoft’s proposals can’t replace the existing “competitive dynamism,” and would merely compensate for the loss of competition through “obligations that would regulate its behaviour” for 10 years only.

The CMA wrote:

We had to consider how best to remedy these concerns. Preventing the merger would preserve the competitive dynamism and level of innovation that exists in the growing cloud gaming market. In contrast, Microsoft proposed a remedy that sought to compensate for the loss of competition with a set of obligations that would regulate its behaviour and how it did business for a period of ten years.

Having carefully considered Microsoft’s proposal, we found that it would not restore the competitive dynamism that would be lost as a result of the Merger. We decided, therefore, that a remedy that preserves competition, rather than one that imposes global regulatory oversight, is the only effective and proportionate way forward.

Activision Blizzard, for its part, does not mince its words in response to today’s news. A spokesperson said that the CMA’s report “contradicts the ambitions of the U.K. to become an attractive country to build technology businesses,” adding that it will “work aggressively with Microsoft” to appeal the decision.

“The report’s conclusions are a disservice to U.K. citizens, who face increasingly dire economic prospects,” the spokesperson said. “We will reassess our growth plans for the U.K. Global innovators large and small will take note that — despite all its rhetoric — the U.K. is clearly closed for business.”

Precedent

It’s worth noting that the acquisition faces scrutiny in other regions around the world. This includes the the U.S., where the Federal Trade Commission (FTC) is suing to block the deal, though Microsoft did recently secure a dismissal in a separate private antitrust lawsuit brought about by gamers.

Elsewhere, Europe has been mulling an in-depth probe for some time already. The European Commission (EC) had previously set a provisional deadline of 25th April to announce a decision, but this was recently moved to May 22. Early reports indicate that Europe could be set to greenlight the deal in the wake of further remedies offered by Microsoft.

However, in being the first political entity to officially reject the acquisition, the U.K. may have set something of a precedent for what’s to come.

“In prohibiting the deal, the CMA has not only put itself in the firing line of the merging parties, but also set an important precedent for the EU Commission and U.S. FTC whose deliberations are ongoing,” Alex Haffner, competition partner at law firm Fladgate, said in a statement.