of Microsoft $68.7 billion all-cash deal gaming giant Activision Blizzard is facing closer antitrust scrutiny in the UK, where the country’s market watchdog has just announced it will move to an in-depth investigation – unless the couple come forward with suitable proposals to address their concerns in the next few days.
The Competition and Markets Authority (CMA) launched a formal investigation into the acquisition in Julyasking for feedback on whether to move on to a more in-depth so-called Phase 2 investigation. It has now been decided that the deal does indeed deserve more scrutiny – with it believed to be able to significantly reduce competition in gaming consoles, streaming services multi-game subscription and cloud gaming services.
Microsoft and Activision have five working days to submit remedies to the CMA to prevent this deeper investigation (which will include the appointment of an independent panel of experts to investigate the concerns uncovered during the Phase 1 investigation).
Commenting in a statement, Sorcha O’Carroll, senior director of mergers at CMA, said:
“Following our Phase 1 investigation, we are concerned that Microsoft may use its control of popular games such as Call of Duty and World of Warcraft post-merger to harm rivals, including recent and future rivals in multi-game subscription services and cloud gaming.
“If our current concerns are not addressed, we plan to examine this deal in an in-depth Phase 2 investigation to reach a resolution that works in the interests of UK gamers and businesses.”
The CMA said it was concerned that if Microsoft, owner of the Xbox brand, bought Activision Blizzard, maker of many popular console, PC and mobile games, it could harm console competitors (“including recent and future entrants”) – by deny access to Activision’s games or by providing access on much worse terms.
Popular franchises developed by Activision include Call of Duty and World of Warcraft. It also owns the mobile game Candy Crush, among other well-liked titles.
“The CMA believes the merger could allow Microsoft to make ABK [Activision Blizzard] content, including Call of Duty, exclusive to Xbox or Game Pass, or otherwise impair its competitors’ access to ABK content, such as by delaying releases or imposing license price increases,” the regulator wrote in notes in summary of its decision, noting that this is known as an “input foreclosure” concern (ie, when a firm uses its control of an important input to harm its competitors).
The CMA continues to include its assessment that Sony will be Microsoft’s main competitor likely to be affected in the short to medium term.
The regulator also said it had received evidence of the potential impact of combining Activision Blizzard with the wider Microsoft ecosystem. “Microsoft already has the leading game console (Xbox), the leading cloud platform (Azure) and the leading PC operating system (Windows OS), all of which could be important to its success in cloud gaming,” the press release reads. “The CMA is concerned that Microsoft could use Activision Blizzard’s games together with Microsoft’s strength in console, cloud and PC operating systems to harm competition in the nascent market for cloud gaming services.”
With regard to cloud gaming, the CMA summarizes its concerns as follows:
“Microsoft now has a combination of assets that is difficult for other cloud gaming service providers. By having a large and well-distributed cloud infrastructure, Microsoft will be able to host games on its servers on preferential terms and reach gamers around the world without having to pay a fee to third-party cloud platforms. By running Windows, the operating system on which the majority of PC games are played, Microsoft can stream games to Windows PCs without having to pay an expensive Windows licensing fee, and may be able to designs and tests games made for Windows more efficiently than competitors. And by having an existing console ecosystem, Microsoft has an existing user base of gamers to which it can promote its cloud gaming services, as well as a range of popular games to offer.
“Therefore, the merger will bring the company together in a uniquely strong position to offer cloud gaming services with one of the strongest game catalogs in the industry.” The CMA is concerned that by leveraging ABK’s content and the broader Microsoft ecosystem, Microsoft will have an unparalleled advantage over current and potential cloud gaming service providers. This could lead to increased concentration in cloud gaming services or the market to “shift” to Microsoft and ultimately deprive users of the competitive advantages of new and emerging providers fighting for success in cloud gaming. The CMA recognizes that if Microsoft significantly increases its market power in cloud gaming services, this could have an indirect effect on independent game developers and publishers who compete with Microsoft’s own game portfolio and who could be put at a disadvantage in a number of ways, such as paying higher fees or being demoted in Microsoft’s gaming ecosystem.”
“The CMA considers that these concerns warrant a thorough Phase 2 investigation. Microsoft and Activision Blizzard now have 5 working days to submit proposals to address the CMA’s concerns.” If no suitable proposals are submitted, the deal will be referred to phase 2 investigation,” the regulator added in its press release.
Microsoft has been contacted for comment on the development. A company spokesperson sent this statement attributed to Brad Smith, its president and vice chairman:
“We stand ready to work with the CMA on next steps and address all of its concerns. Sony, as the industry leader, says it’s worried about Call of Duty, but we’ve said we’re committed to making the same game available on the same day on both Xbox and PlayStation. We want people to have more access to games, not less.”
The tech giant also pointed out a blog post Microsoft Gaming CEO Phil Spencer posted today – so don’t waste your time bringing out the PR big guns – in which he lays out a vision for “gaming for everyone, everywhere”; touting an “opt-in” strategy that he says will see Microsoft make Activision’s much-loved titles available through its Netflix-like gaming subscription offering, Game Pass, “to grow those gaming communities.”
“We’ve heard that this deal could take franchises like Call of Duty away from where people are currently playing them.” That’s why, as we’ve said before, we’re committed to making the same version of Call of Duty available on PlayStation the same day the game launches elsewhere,” Spencer continued. “We will continue to enable people to play with each other across platforms and devices. We know players benefit from this approach because we did it with Minecraft, which continues to be available on multiple platforms and has expanded to even more since Mojang joined Microsoft in 2014.
“As we expand our game store into new devices and platforms, we’ll make sure we do so in a way that protects developers’ ability to choose how to distribute their games.”
Also today, Activision CEO Bobby Kotick posted open letter to employees, in which he reiterated that the firm’s management team expects oversight of the acquisition to be a “long process” — but also offered a “probable” closing date of mid-2023.
“With the number of required government approvals, we still believe the deal is most likely to close in Microsoft’s fiscal year ending June next year.” We are pleased to have already received approvals from several countries and the process with all regulators is generally progressing as we expected,” he wrote. “This week we received information from the UK, where we have more staff than anywhere else except North America. We have entered the second phase of our review there and will continue to cooperate fully with the regulators there and approvals are required everywhere.”
“As our industry continues to see many companies investing aggressively in gaming, including many of the world’s largest technology and media companies, government regulators are taking appropriate and deliberate steps to better understand our industry and the growing competition from the whole world,” adds Kotik.
Other regulators considering the Microsoft-Activision acquisition include the US FTC.