The Competition and Markets Authority ("CMA") announced on 26 April that it had blocked Microsoft's proposed acquisition of Activision Blizzard, a US-based video game publisher, following a detailed "Phase 2" merger inquiry.
The CMA's decision, which follows its consideration of responses to its provisional findings, comes after several months of investigation to understand the potential impact of the merger, which would have been the largest acquisition in the history of the gaming industry.
The CMA had originally published provisional findings on 8 February 2023 that the proposed deal would result in a substantial lessening of competition in the markets for the supply of consoles and cloud gaming services in the UK, leaving gamers with higher prices, fewer choices or less innovation.
On 24 March the CMA issued updated provisional findings to the effect that the merger would not substantially lessen competition for the supply of consoles, having received more information that alleviated its initial concerns in that market. However, the provisional findings as regards the cloud gaming market were unaffected by that update and have now been confirmed by the CMA's decision.
Competition in the supply of cloud gaming services
The CMA concluded that an important aspect of cloud gaming providers' ability to attract users in the developing gaming market will be their ability to offer popular games. According to the CMA's research, 60-70% of global cloud gaming services are already provided by Microsoft. Its position in the market is strengthened by its ownership of Xbox, Windows (the leading PC operating system) and both Azure and Xbox Cloud Gaming (global cloud computing infrastructures).
The CMA has concluded that this position would be reinforced by Microsoft acquiring Activision and either making Activision games exclusive to its own cloud gaming service, or making them available on other services but under "materially worse conditions". The decision noted that Microsoft has used the strategy of buying games and making them exclusive to its own platforms after previous acquisitions of games studios.
The CMA's reasoning is that this would reduce the competition Microsoft faces in the UK, which could have a potentially harmful impact in the future on UK gamers. In particular the CMA believes it would affect those who do not wish to buy or cannot afford an expensive gaming console or PC, and who could see their ability to access those popular games negatively affected.
Competition in the supply of consoles
The CMA had initially been concerned that the acquisition could have the effect of substantially weakening competition between consoles, in particular between Microsoft's Xbox and Sony's Playstation, due to the important role that access to key games (such as Activision's flagship title Call of Duty) plays in driving competition between consoles. However, evidence presented to the CMA following its provisional findings indicated that no plausible scenario would allow Microsoft to benefit financially from giving its own Xbox console exclusivity in relation to Activision games, leading to the CMA's updated conclusion that the merger was unlikely to lead to a substantial lessening of competition in this area.
Regulatory action further afield
Microsoft's proposed acquisition is also facing competition law challenges in other parts of the world, with the US Federal Trade Commission having filed an antitrust case challenging the deal in December 2022. Preliminary hearings are due to commence in August.
The European Commission (which has jurisdiction in the EU, and would have precluded independent CMA action prior to Brexit) is currently considering commitments proposed by Microsoft – essentially undertakings to do, or not do, certain things following the merger in order to alleviate competition concerns and avoid the deal being rejected by competition regulators.
What is the future of this deal?
The CMA is the first to issue a decision out of the three competition regulators whose approval of the deal was key to it proceeding. Microsoft and Activision have indicated that they intend to appeal the CMA's decision, including on the basis that they offered to sign up to certain commitments that would mitigate any harm on competition. Prior to the decision Microsoft had been pursuing "behavioural" solutions to competition concerns, including licensing deals with rivals Nintendo and Nvidia to ensure Call of Duty is brought to their products and services at the same time it is brought to Xbox. While those may still satisfy the European Commission, they were rejected by the CMA on the basis that they were "not effective to remedy [the CMA's] concerns and would have replaced competition with ineffective regulation in a new and dynamic market". The CMA has previously indicated scepticism of such "behavioural" remedies, which require significant resources to monitor and enforce. This is in contrast to "structural" remedies of blocking or divestment: the CMA had suggested that Call of Duty be divested from the Activision deal to help get it over the line, but this was rejected by Microsoft as unrealistic.
The CMA has been open more broadly about a conscious shift in approach to mergers in digital and technology markets, which can reach across supply chains and across vertical or adjacent markets, after the 2019 Furman and LEAR reports in the UK found "historic under-enforcement in respect of acquisitions by the major digital platforms". The CMA's strict stance on the Microsoft/Activision deal is likely to be an example of that shift in action.
Together with the CMA's 6 April announcement that it has decided to investigate the acquisition by Amazon of iRobot, a maker of household cleaning robots, and its decision last year to order Facebook to unwind its acquisition of Giphy, this decision is another sign that the CMA is concerned about the potential for tech giants to make so-called "killer acquisitions" of potential rivals, particularly in nascent markets such as cloud gaming services. It appears that the CMA is prepared to use its post-Brexit jurisdiction to block or unwind even large global deals where it considers it necessary to do so.