UK Doesn’t Want Microsoft’s Activision Blizzard Deal, So What Happens Next?

UK Doesn't Want Microsoft's Activision Blizzard Deal, So What Happens Next?

Microsoft is angry. Last week, a surprise decision by the UK’s Competition and Markets Authority (CMA) blocked the $68.7 billion deal to acquire Activision Blizzard in the UK amid concerns about the future of cloud gaming.

Microsoft President Brad Smith was up at 2am that morning, hastily typing a reply from across the pond Bloomberg. Speaking to the BBC a day later, he described the UK regulator’s decision as the “darkest day” for Microsoft in its four decades of service in the UK. He went a step further, saying “the European Union is a more attractive place to start a business” than the UK, a particularly sharp statement given the political woes surrounding Brexit.

Now Microsoft is hurt, angry and planning its next move. If Brad Smith’s battle talk is to be believed, Microsoft will try to keep this deal alive. But appealing the CMA’s decision won’t be easy.

Microsoft President Brad Smith previously appeared in Brussels to argue in favor of the Activision deal.

UK regulators have cracked down on M&A activity in recent years, coinciding with the UK’s exit from the European Union. To challenge its latest decision, Microsoft must file a complaint with the Competition Appeal Tribunal (CAT), a process that can take months. It must convince a jury that the CMA acted irrationally, illegally, or with procedural error or unfairness. And the odds of winning are slim. “The CMA has won 67 percent of all merger appeals since 2010,” Nicole Kar, a partner at law firm Linklaters, wrote in 2020. I spoke to Kar after the CMA’s Microsoft decision, and she confirmed that the CMA still holds the Majority wins any appeals.

Meta’s battle with the CMA to acquire Giphy shows what Microsoft is up to. Meta was originally ordered to sell Giphy in 2021, but appealed the ruling and was unsuccessful. Meta eventually had to comply with UK competition regulators and divest itself of social media GIF library Giphy. Viagogo’s $4 billion acquisition of StubHub was also partially blocked by the CMA, forcing the company to retain StubHub’s US and Canadian operations but sell its UK and international businesses.

Microsoft fought with the CMA during the review process, publicly criticizing the regulator’s math and forcing it to fix “clear errors” in its financial calculations related to withholding call of Duty from PlayStation.

These errors forced the CMA to make a rare reversal with its preliminary findings and dropped concerns call of Duty and the impact of Microsoft’s deal on console competition. But crucially, cloud gaming concerns remained unresolved – resulting in the deal being blocked. Sony, which has become one of the main opponents (alongside Google) of Microsoft’s acquisition of Activision, called the CMA’s initial about-face a “surprising, unprecedented and irrational” decision, but the PlayStation maker has yet to comment on the decision Regulatory authority voiced decision to block the deal.

The CMA said in September it was concerned about the impact of Microsoft’s ownership of Activision Blizzard games on existing competitors and emerging market entrants offering multi-game subscriptions and cloud gaming services. I tweeted at the time that all the headlines around call of Duty would be just noise, and there would be greater concerns about Microsoft’s ability to leverage Windows and Azure unlike its competitors, and how it might impact game distribution and revenue sharing across the gaming industry with its Xbox Game Pass subscription.

call of Duty was not a big problem for the CMA.
Image: Activision Blizzard

Microsoft knew cloud gaming was going to be a key concern, so over the past few months it has been preparing to sign deals with Boosteroid, Ubitus and Nvidia to allow Xbox PC games to run on competing cloud gaming services can. These 10-year deals also include access to call of Duty and other Activision Blizzard games if Microsoft’s deal is approved by regulators. If not approved, Activision games offerings will be disabled and only access to Microsoft Xbox PC games will be provided.

But these deals have not convinced the UK. The CMA says they are “too limited in scope” with models that mean players must acquire the right to play games “by purchasing them at 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 on competing multi-game subscription services or provide them on to offer computer operating systems other than Windows.

Limiting support to Windows would make competing cloud gaming services customers of Microsoft and help the software giant secure its operating system dominance if there were ever a major move to cloud gaming. Valve’s SteamOS currently poses the only realistic threat to Windows gaming dominance, and if cloud providers need to license Windows to run games like this call of Dutythen it’s unlikely we’ll see the move to Linux that Google was hoping to push with its failed cloud gaming service Stadia.

Most of this agreement now rests on the shoulders of the European Union. The cloud deals that Microsoft has signed are also intended to reassure regulators in the EU. Reuters reported last month that the Activision deal is likely to be approved by EU regulators following Nvidia and Nintendo’s licensing deals. The EU is due to make a decision by May 22, and Microsoft is once again attempting to stay ahead of regulators by signing a new deal with European cloud gaming platform Nware. Nvidia and Boosteroid, both of which signed Microsoft’s 10-year cloud deal publicly questioned the CMA’s decision, which Microsoft hopes this type of support will influence EU regulators.

An EU approval could offer a glimmer of hope for Microsoft’s behemoth, as such a move would put pressure on the UK, as the only major market, to block the acquisition outright. Regulators in Saudi Arabia, Brazil, Chile, Serbia, Japan and South Africa have already approved the deal. However, Microsoft has problems in the vicinity.

In the US, the Federal Trade Commission sued late last year to block the deal between Microsoft and Activision Blizzard. The FTC case is still in the document discovery phase, with an evidence hearing scheduled for August 2. Lawyers for Microsoft and Sony are already arguing about which (and how many) documents should be produced as part of the legal discovery process, and we’re months away from knowing how the case will proceed.

Microsoft has always claimed that the deal will be finalized by the end of fiscal 2023, which is the end of June. But that deadline now looks incredibly unrealistic given the CMA’s intervention. We’ll definitely see some struggles from Microsoft in the coming weeks, but if EU regulators share the same concerns as the CMA, then Microsoft will almost certainly be game over. It’s hard to imagine that it’s really willing to face months or years of court battles with multiple regulators in Europe while also facing the prospect of the FTC attempting to break up the deal. So all eyes are on Brussels for the next few weeks.

#Doesnt #Microsofts #Activision #Blizzard #Deal

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