On Wednesday, the UK’s Competition and Markets Authority (CMA) blocked Microsoft from buying Activision Blizzard, a video game company responsible for some huge video games like Call of Duty, World of Warcraft, and Overwatch. This decision was due to concerns that the deal would give Microsoft a monopoly in the cloud gaming sector.
The news prompted a furious reaction from both Activision and Microsoft, who accused the UK of being “closed for business” and less attractive than the EU. Unsurprisingly, this sparked a fiery debate about whether the CMA was right to block the deal and whether the UK really is closed for business post-Brexit. In this article, we’ll take a look at the deal itself and the reasons behind the CMA’s decision to block it.
The Deal Itself
In January 2022, Microsoft announced its intention to buy Activision Blizzard, commonly known as Activision, for $68.7 billion. This is an enormous sum of money, and it’s because Microsoft is arguably the world’s biggest gaming company, while Activision is a massive company in its own right.
Measured by 2022 revenue, Activision is the world’s fifth-largest gaming company, bringing in nearly $7.5 billion last year, more than household names like EA, Epic Games, and Ubisoft. For context, Microsoft is number two with $16.2 billion in revenue, behind Sony but ahead of Tencent and Nintendo.
Activision makes most of its money from video game sales, a plurality of which comes from the best-selling video game series Call of Duty. The latest installment in the series, Call of Duty Modern Warfare 2, which was released in October, raked in nearly $2 billion in its first three months, the highest opening quarter sell-through in the franchise’s history. Despite coming out in October, it was the best-selling game of the year in the US and has continued to sell well into 2023.
In the following sections, we will delve into the reasons behind the CMA’s decision to block the acquisition and examine the reactions from Microsoft and Activision. Stay tuned as we analyze this controversial situation and try to figure out whether the CMA’s decision was justified.
Why the CMA Blocked the Deal
Microsoft’s proposed deal raised eyebrows when it was first announced. After all, while it was pitched as an acquisition, in some ways it’s more of a merger between two of the five biggest gaming companies globally. This is why by the end of 2022, three antitrust regulators—regulators responsible for preventing sector-specific monopolies—had launched inquiries into the deal.
The UK’s CMA launched an inquiry in June, the European Commission launched an inquiry in November, and the US Federal Trade Commission launched an inquiry in December.
The CMA announced its verdict on Wednesday, stating that it would be blocking the deal over concerns that it would give Microsoft a monopoly in the cloud gaming sector. To understand this ruling, you need to understand the difference between what the CMA describes as the “console gaming market” and the “cloud gaming market.”
The console gaming market is gaming as we know it today: buying a piece of hardware like an Xbox or a PS5 and then purchasing discs to play games. Cloud gaming, on the other hand, reduces the amount of physical hardware involved in gaming.
Microsoft’s Xbox Cloud Gaming, where users pay a monthly fee to access a whole load of Xbox exclusives instead of buying physical or individual copies of games, is a classic example. Eventually, cloud gaming is expected to remove the need for consoles and expensive PCs entirely, allowing users to play their favorite games on any laptop with a strong internet connection.
Initially, the CMA was worried that the deal would give Microsoft a monopoly in both the console and cloud gaming markets. In the console market, the CMA was concerned that if Microsoft and therefore Xbox had exclusive access to Activision’s games, that might make the Xbox so attractive that it would overtake PlayStation and eventually monopolize the console markets.
In the cloud gaming market, the CMA was worried that the combination of Microsoft’s pre-existing dominance of the cloud gaming market and exclusive access to popular titles like Call of Duty might give it a de facto monopoly.
For context, Microsoft is the industry leader in cloud gaming, accounting for an estimated 60 to 70% of the market, and it also has certain structural advantages over its competitors, not least because it owns the leading PC operating system in Windows and an established cloud service provider in Azure.
In the end, the CMA decided that while it didn’t think the deal threatened the console market, in part because it didn’t think Microsoft had a commercial incentive to make Call of Duty exclusive to Xbox, it would give Microsoft a dangerous monopoly in the cloud gaming market.
In their report, the CMA argued that the merger would substantially reduce future growth, competitive dynamism, and innovation in the cloud gaming market, ultimately harming UK consumers and decided to block the deal. This was despite last-minute assurances by Microsoft that they would continue to provide Activision games, including Call of Duty, on other platforms for at least 10 years.
Microsoft and Activision’s Reaction
Unsurprisingly, the CMA’s decision provoked a furious response from both Activision, who saw their stock price drop 11% on the news, and Microsoft, who will have to pay a $3 billion break fee if the deal falls apart.
Activision’s press team labeled the decision a disservice to UK citizens, who face increasingly dire economic prospects and accused the UK of being closed for business.
Microsoft’s president told the BBC that the European Union is a more attractive place to start a business than the UK, and that Brussels was a place where one can sit down and actually have a conversation with the regulators.
Both companies announced they would be appealing the decision, with a final ruling expected before the end of the year.
So, who’s right in this situation? To be fair to the CMA, if you accept their claim that Microsoft already has 60 to 70% of the industry, then there does seem to be a real risk of monopoly.
Detractors have pointed out that this looks inconsistent, given that Sony engages in monopolistic behavior on its PlayStation network, and the CMA doesn’t seem too fussed about that. However, two wrongs don’t make a right, or rather, two monopolies don’t make a competitive market.
As to whether the EU is a better place to do business than the UK, it’s probably worth waiting to see how the European Commission rules on this case later this year.
Ultimately, who you side with will depend on two things: first, how worried you are about monopolies, and second, the extent to which you trust the government to regulate markets.