Microsoft is furious. Last week, a surprise decision by Britain’s Competition and Markets Authority (CMA) saw the $68.7 billion deal to acquire Activision Blizzard blocked in Britain over concerns about the future of cloud gaming.
Microsoft president Brad Smith was awake at 2 a.m. that morning and hurriedly wrote a response from across the pond, according to Bloomberg. Speaking to the BBC a day later, he called the UK regulator’s decision the “darkest day” for Microsoft in its four decades of operation in Britain. He went a step further, saying that “the European Union is a more attractive place to start a business” than the UK, a particularly sharp statement given the political issues surrounding Brexit.
Now Microsoft is bruised, angry and plotting its next move. If Brad Smith’s fight talk is anything to go by, Microsoft will try to keep this deal alive. But the CMA’s decision won’t be easy to appeal.
UK regulators have cracked down on mergers and acquisitions in recent years, coinciding with the UK’s departure from the European Union. To challenge its latest decision, Microsoft will have to file a notice with the Competition Appeal Tribunal (CAT), a process that could take months. It will have to convince a panel of judges that the CMA acted irrationally, illegally, or procedurally improper or unfair. And the chance of winning is small. “The CMA has won 67 percent of all merger appeals since 2010,” Nicole Kar, a partner at the law firm Linklaters, wrote in 2020. I spoke with Kar after the CMA’s Microsoft decision, and she confirmed that the CMA is still the majority of possible appeals.
Meta’s battle with the CMA over the Giphy acquisition shows what’s in store for Microsoft. 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 get rid of the social media GIF library Giphy. Viagogo’s $4 billion acquisition 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 operations.
Microsoft skirmished with the CMA during the review process, publicly criticizing the regulator’s math and forcing it to fix “obvious errors” in its financial calculations around withholding Duty from Playstation.
Those mistakes forced the CMA to make a rare U-turn with its preliminary findings, allaying concerns Duty and the impact of Microsoft’s deal on console competition. But crucially, it left cloud gaming concerns open, which led to the deal being blocked. Sony, which has emerged as one of the main opponents (alongside Google) of Microsoft’s acquisition of Activision, called the CMA’s initial turnaround a “surprising, unprecedented and irrational” decision, but the PlayStation maker has yet to comment. commented on the regulator’s decision. decision to block the deal.
The CMA said in September it was concerned about the effects of Microsoft’s ownership of Activision Blizzard games on existing rivals and emerging entrants offering multi-game subscriptions and cloud gaming services. I tweeted at the time that all the headlines around Duty were just noise, and there would be bigger concerns about Microsoft’s ability to leverage Windows and Azure, as opposed to its competitors, and how it could impact game distribution and revenue shares in the gaming industry with its Xbox Game Pass -subscription.
Microsoft knew cloud gaming would be a major concern, which is why it’s been preparing for the past few months, striking deals with Boosteroid, Ubitus, and Nvidia to run Xbox PC games on rival cloud gaming services. These 10-year deals also include access to Duty and other Activision Blizzard games if Microsoft’s deal is approved by regulators. If it’s not approved, the Activision game deals will be off, providing access to Microsoft’s Xbox PC games only.
But these deals have not convinced the UK. The CMA says they are “too restrictive” with models that mean gamers must acquire the right to play games “by purchasing them from certain stores or subscribing to certain services.” There are also concerns that Microsoft may retain all revenue from Activision game sales and in-app purchases or that cloud providers may not be able to provide access to these games through competitive multi-game subscription services or offer them on computer operating systems other than Windows.
Limiting support to Windows would turn rival cloud gaming services into Microsoft’s customers, helping the software giant secure its dominance in operating systems if there ever was a bigger shift to cloud gaming. Valve’s SteamOS is the only realistic threat to Windows’ gaming dominance right now, and if cloud providers have to license Windows to run games like Dutythen it’s unlikely we’ll see the switch to Linux that Google tried to push with its failed Stadia cloud gaming service.
The bulk of this deal now rests on the shoulders of the European Union. The cloud deals signed by Microsoft are also aimed at satisfying regulators in the EU. Reuters reported last month that the Actvision deal is likely to be approved by EU regulators following Nvidia and Nintendo’s licensing deals. The EU is due to make a decision on May 22, and Microsoft is once again trying to get ahead of the regulators by striking a new deal with European cloud gaming platform Nware. Nvidia and Boosteroid, both of which signed Microsoft’s 10-year cloud deal, have done just that publicly questioned the CMA’s decision, with Microsoft hoping this kind of support will influence EU regulators.
An EU approval could provide a glimmer of hope for Microsoft’s mammoth deal, as such a move would put pressure on the UK as the only major market to block the takeover outright. Regulators in Saudi Arabia, Brazil, Chile, Serbia, Japan and South Africa have already approved the deal. Closer to home, however, Microsoft is experiencing problems.
In the US, the Federal Trade Commission filed a lawsuit late last year to block the deal between Microsoft and Activision Blizzard. The FTC case is still in the document discovery stage, with an evidence hearing scheduled for August 2. Lawyers from Microsoft and Sony are already discussing which (and how many) documents should be presented as part of the legal discovery process, and it will be months before we know how the case will go.
Microsoft has always maintained that the deal will close by the end of fiscal year 2023, which is the end of June. But that deadline now seems incredibly unrealistic given the intervention of the CMA. We’re sure to see some fighting from Microsoft in the coming weeks, but if EU regulators share the same concerns as the CMA, then it’s almost certainly game over for Microsoft. It’s hard to imagine it actually willing to battle it out in court for months or years with multiple regulators in Europe, while facing the prospect of the FTC trying to break up the deal. All eyes will therefore be on Brussels in the coming weeks.