Here’s What the U.K.’s Blocking of the Microsoft-Activision Deal Means

The Washington Post / Gene Park

12:41 JST, April 27, 2023

Britain just blocked the sale of game publishing giant Activision Blizzard to Microsoft, putting the future of the $69 billion deal in doubt.

Both companies have been making their case to regulatory bodies around the world, including the U.S. Federal Trade Commission, for approval of the massive, landmark acquisition. Britain’s Competition and Markets Authority (CMA) stated in its decision Wednesday that “the merger could make Microsoft even stronger in cloud gaming, stifling competition in this growing market.” Microsoft announced its intention to buy Activision Blizzard in January 2022.

Here are answers to your questions about what the British decision means.

How big is Microsoft’s Xbox in the gaming industry?

Microsoft and its Xbox system are in third place in the video game console market, behind Nintendo and Sony PlayStation.

Xbox competes with Sony in the high-end console market, while Nintendo’s Switch is essentially a mobile device. PlayStation 5, released in 2020, and the Switch, released in 2017, compete each month for the position as top-selling machine, while Xbox is always behind.

Microsoft’s Xbox division does own 23 game development studios, including several from its $7.5 billion acquisition of Bethesda Softworks, publisher of popular series such as Elder Scrolls and Fallout.

Why is Microsoft buying so many game companies?

All three major console manufacturers have bought game companies. But Xbox has historically struggled in creating its own platform-exclusive games, which are important in selling consoles. Nintendo has been creating Mario, Zelda and Pokémon games for decades, while Sony PlayStation has bought several quality studios, including Insomniac Games, developer of the popular Spider-Man series.

So Xbox has aimed to buy up major publishers in an attempt to compete against the exclusive offerings of Nintendo and Sony. Xbox’s marquee franchise is the Halo series, but its latest game has failed to live up to commercial expectations because of its inability to function as a live service like “Fortnite” and Activision’s “Call of Duty: Warzone.”

Why does Microsoft want Activision Blizzard?

Microsoft likes Activision because it creates and publishes the Call of Duty franchise, a game series that reliably tops the sales charts every year. It is the most popular multiplayer shooter on the market, having amassed more than $30 billion in revenue.

The Blizzard side of the business creates and publishes the most popular franchises that run on personal computers, including the Warcraft and Diablo series. Microsoft has also said that the company’s King mobile games division is key to the acquisition. Microsoft has no real footing in the mobile gaming space, but King publishes “Candy Crush,” the most popular smartphone game ever made.

These are just the biggest intellectual properties associated with the company. Microsoft’s goal is to acquire a company that gives it the most popular games across consoles, PCs and mobile, the full breadth of the industry.

What happens to Call of Duty if the deal closes?

Microsoft has already stated its intention to still allow Call of Duty games to be published on PlayStation and other platforms for at least 10 years. Because of PlayStation’s strong position in the market, most of the money made for Call of Duty is on PlayStation, and restricting the game to only Xbox could be a revenue loss. Xbox CEO Phil Spencer said it’s in Microsoft’s best interest to ensure that Call of Duty remains on different platforms.

What is cloud gaming, and why does it matter to the deal?

Cloud gaming is an emerging part of the industry in which the audience plays video games streamed through the cloud, and not through any software installation in hardware. Microsoft is the only company of the three major platforms heavily invested in cloud, which allows Xbox games to be played on mobile phones, smart TVs and other devices. The CMA’s decision acknowledges the company’s “strong position.”

Sony’s PlayStation service does offer cloud gaming access through its PS Now service, but it has not been a pillar of Sony’s business strategy. Nintendo’s Switch console offers some cloud games, but those are only high-fidelity games that couldn’t run on the machine’s aging mobile chipset.

The CMA has concerns that Microsoft would further dominate the space by putting Activision Blizzard games in the cloud and “risk undermining the innovation” that would expand the sector. Its decision highlights that Microsoft “already accounts for an estimated 60-70% of global cloud gaming services,” along with owning Windows, the main PC games platform, and Azure, its powerful cloud computing infrastructure. Microsoft is often first in various countries to establish cloud servers, as in South Africa, and it has expanded to the Middle East.

Cloud gaming is still fresh. Microsoft is making footholds in the sector, but it’s yet to be proved as the future of the games industry. Native gaming on PC, mobile and console platforms is still, by and large, the preferred method of play.

What else is Britain worried about?

The CMA also said Microsoft’s proposal “was not sufficiently open to providers who might wish to offer versions of games on PC operating systems other than Windows.” One might argue that if the CMA is concerned about the dominance of Windows as a PC operating system, it’s several years too late. The Apple hardware infrastructure has historically been hostile to game development. It’s not just Microsoft that’s ignoring putting its games on Mac devices – it’s most of the games industry.

What does Britain’s decision mean for the merger?

It’s a major setback, but there could be ways to fix it. Gaming analyst Michael Pachter told Axios that Microsoft could carve out its cloud gaming service, sometimes called xCloud, in Britain to satisfy these concerns.

The CMA did say in its decision that its concerns over the console market were satisfied and that it doesn’t expect a “significant lessening” of competition in the console space. Microsoft initially tried to allay concerns over that issue by publicly declaring that the Call of Duty series would be available for every platform, including PlayStation. The CMA still said this doesn’t satisfy its concerns over cloud gaming.

Activision Blizzard released a statement Wednesday saying that “the report’s conclusions are a disservice to UK citizens, who face increasingly dire economic prospects. We will reassess our growth plans for the UK. Global innovators large and small will take note that, despite all its rhetoric, the UK is clearly closed for business.”

Britain’s decision is likely to affect the U.S. regulatory process. In December, the FTC filed a lawsuit to block the merger, fueled by concerns that it would stifle competition. The Fair Trade Commission, an antitrust watchdog in Japan, another key market for the games industry, said it had no concerns about competition being stifled.

What can Microsoft try next?

Microsoft President Brad Smith tweeted a statement Wednesday saying that the decision “appears to reflect a flawed understanding of this market and the way relevant cloud technology actually works” and that the tech giant will appeal.

Microsoft had hoped to close the deal by July 18, but the CMA decision means the merger won’t meet that deadline, and Microsoft will have to negotiate an extension. The FTC on Wednesday said its concerns align with the CMA decision. This issue is far from over.

“We remain confident that our deal with Microsoft benefits competition, consumers and job creation in markets around the world, especially in the UK,” Activision Blizzard CEO Bobby Kotick said Wednesday in an announcement of the company’s first-quarter results. “The CMA’s report today does not reflect these realities, and we will work aggressively with Microsoft to reverse it on appeal.”