Is it game over for Microsoft’s $69 billion acquisition of Activision Blizzard?
The UK Competition and Markets Authority (CMA) announced earlier this week that it will sue to block the deal, and the regulator seems to have caught Microsoft, Activision Blizzard and many industry watchers by surprise.
“I really don’t understand CMA’s argument here, other than ‘American companies bad,’” said Ana Milicevic, co-founder and principal at Sparrow Advisers.
Meanwhile, Activision Blizzard CEO Bobby Kotick called the CMA’s decision “irrational” in an interview with Bloomberg on Thursday.
But the CMA had its reasons.
It cited Microsoft’s dominance over the emerging cloud gaming market, which could become more entrenched if Activision Blizzard’s popular video game franchises, including Call of Duty, were made exclusive to Microsoft’s Xbox consoles, app store and cloud gaming product.
Pundits predicted Microsoft would use Xandr to create an ad-supported video game content fortress, with the ad tech business getting exclusive access to Microsoft’s gaming IP. Any ambitions in that direction may now be on hold.
Ahead in the cloud
The antitrust argument against the Activision Blizzard deal hinges on the exclusivity of Activision Blizzard’s game titles which, in addition to Call of Duty, include the Candy Crush, Diablo, World of Warcraft and Overwatch franchises.
Microsoft was aligned with the CMA’s initial requirement for a 10-year nonexclusive licensing agreement, which would ensure a long window for Activision Blizzard game titles to be available on other gaming consoles and platforms.
But console exclusivity wasn’t the main issue for the CMA. According to the CMA’s report this week, if Call of Duty was exclusive to Xbox, it wouldn’t be “financially beneficial” to Microsoft, and PlayStation wouldn’t be materially harmed if Xbox could charge less for Activision games or offer exclusive perks for gamers who play those games on Xbox consoles.
The sticking point, instead, was the cloud gaming market.
Microsoft controls three-fifths of the global cloud gaming market. And with Xbox Cloud Gaming, Windows and Microsoft Azure under one roof, Microsoft can flex anticompetitive advantages over any cloud gaming competitors, according to the CMA.
Cloud gaming is a nascent business, but even major players have struggled to make a splash. Google’s Stadia cloud gaming business shut down earlier this year. The struggle by other companies (even Google) to stand up an alternative is a clear concern.
Plus, the CMA had access to internal communications by Microsoft and Activision Blizzard execs discussing their respective strategies should the merger happen or not.
“The evidence available to the CMA showed that Microsoft would find it commercially beneficial to make Activision’s games exclusive to its own cloud gaming service,” Tim Cowen, chair of the antitrust practice at UK law firm Preiskel and Co, told AdExchanger.
But if the deal doesn’t happen, Cowen said, the CMA concluded Activision Blizzard would be incentivized to offer its video game IP on non-Microsoft cloud services.
App store competition
Microsoft has been public about wanting Activision Blizzard to serve as the foundation for a mobile app store to compete with Google and Apple.
“That’s precisely the scenario the CMA is trying to protect from,” said Milicevic.
The possibility of Microsoft creating more competition in the app store market wasn’t enough to allay anticompetitive concerns about the cloud gaming sector. And the CMA likely wasn’t convinced that Microsoft entering the app store business would lead to healthy competition, anyway.
“Creating another walled garden app store is less attractive as a competitive market structure than multiple apps available over the open web,” Cowen said.
Despite the popularity of mobile properties like Call of Duty Mobile and Candy Crush, Activision Blizzard’s IP alone probably wouldn’t be enough for Microsoft to build a viable app store, said Andre Sevigny, CRO at Pubfinity and former director of monetization for the Microsoft Casual Games Studio.
The concern, instead, is that a Microsoft app store would give Microsoft the chance to sell more Game Pass subscriptions, Sevigny said, “helping it grow its cloud gaming business and, in the CMA’s eyes, Microsoft’s dominance in that space.”
What about in-game ads?
Still, antitrust concerns about dominance in the cloud gaming market could be making a mountain out of a molehill.
The console gaming market, for instance, accounted for $35 billion in sales revenue last year, compared to the cloud gaming market at $5 billion, according to research consultancy Omdia.
And cloud gaming sales revenues are also eclipsed by the growing video game ad market. Gaming ad revenue across mobile, digital video and esports was $8.6 billion in 2022, which eMarketer expects will grow to $9.5 billion this year.
Microsoft could also combine cloud and console gaming with in-game advertising. Last year, the company filed a patent for technology to serve personalized ads through Xbox consoles and its cloud gaming service.
But the potential for Microsoft to grow its share of the video game ad market doesn’t appear to have been a major consideration for the CMA – despite the fact that the regulator has blocked other acquisitions, like the Meta-GIPHY merger, due to concerns about one entity controlling too much of the ad market in an emerging media channel.
Although the CMA didn’t explicitly call out Microsoft’s ad business in its ruling, the regulator is obviously concerned about the possibility of Microsoft expanding its walled garden, Cowen said.
That said, it’s unclear just how much of a leg up the Activision Blizzard deal would give Microsoft in the video game ad market.
“I don’t think a large advertising business would have necessarily followed from the transaction if it occurred,” said Brian Wieser, principal at Madison and Wall and former global president of business intelligence at GroupM. Outside of mobile gaming, ad-supported video gaming remains a small market, he said.
What’s next?
Microsoft could still move forward with the acquisition and simply avoid selling Activision Blizzard titles in the UK, which is the world’s sixth largest market for video games, according to Newzoo BV.
“While [the UK] is an attractive market, ultimately one can skip it, especially if the wider EU market is in play,” said Milicevic. “That post-Brexit reality doesn’t seem to be readily accepted in the UK.”
But cutting the UK would be impractical, said Sevigny. “Just imagine all the work required to carve out the UK from all the existing distribution and licensing agreements that Microsoft would inherit from the deal.”
Microsoft and Activision Blizzard plan to appeal the CMA’s decision, but it’s difficult to win a reversal. The CMA’s appeals tribunal only considers whether a decision was legal and rational and whether proper procedure was followed, according to a Wall Street Journal report on the ruling.
Still, Cowen said procedural questions could work in Microsoft’s favor, since “the CMA looks to have placed a lot of weight on Activision Blizzard’s internal documents and plans that were not certain.”
Even if the CMA’s decision is struck down or Microsoft decides to stop selling Activision Blizzard titles in the UK, the merger is still subject to approval by the Federal Trade Commission in the US and the European Commission in the EU.
