Regulators’ case against Microsoft’s purchase of Activision must be based on more than just the power of the US tech giant’s “ecosystem.”
The UK is taking on a tough target to fight its $69 billion acquisition of Activision Blizzard Inc., a video game publisher. the case of tech giants. This deal offers a possible high-profile scalp.
Go to the UK Competition & Markets Authority. The agency concluded earlier this month that the combination poses a “realistic” threat to competition, paving the way for a deeper investigation. If this next investigation crosses the higher threshold of showing that damage is “probable,” the probability of the transaction dying increases significantly.
The UK’s antitrust approach has evolved since Brexit, leading to notable differences with Europe. The UK, in particular, has expressed its aversion to approving potentially anticompetitive deals just because an acquirer promises to be good – the so-called behavioral remedy.
That stance doesn’t necessarily mean the UK is more likely to block mergers. Like the US Federal Trade Commission, Meta Platforms Inc. to buy software company Kustomer without legal action, while Europe only granted approval after the Facebook owner agreed to long-term restrictions on its behavior. But it does show the value of convincing the British watchdog that a deal is not a problem in the first place.
With Activision, the CMA sees problems in three markets: game consoles, subscription services and – most importantly – cloud gaming.
It thinks Microsoft has incentives to withhold Activision titles like blockbuster Call of Duty from rival Sony Group Corp’s PlayStation console. After all, a gamer’s choice of hardware is often determined by its suitability for just one title that can be played for hundreds of hours. The CMA says Microsoft is already taking such an approach with some future releases from Bethesda, the studio it bought last year.
A similar dynamic applies to game library subscriptions. If Activision titles were available to rent exclusively through Microsoft’s Game Pass service, the tech giant could bring in new members. These tactics could increase Microsoft’s audience, allowing more gaming content to be sent to its platforms and, in turn, attracting more gamers — a virtuous circle for the US tech giant, a vicious circle for competitors.
No wonder Sony’s market value fell by $20 billion, or 13%, shortly after the deal was announced in January and has continued to fall since then.
These concerns are not a regulatory hit. One hurdle is to determine that Microsoft has a commercial incentive to restrict Activision titles. The CMA says that licensing revenue lost as a result “may” be offset by the strategic advantage of attracting more people to Microsoft’s domain. But with games that sell well, that benefit must be quite substantial, given the blow to revenue from the elimination of third-party distribution.
Then there is the thorny issue of remedies. Microsoft has already made some general public commitments (which Sony has reportedly criticized for being short-lived). The key is whether these are easy to monitor and remain relevant as technology evolves. Appropriate commitments could be to forgo making Activision games exclusive (both by purchase and subscription), and favor proprietary products over those from Sony and rival Nintendo Co., says Bloomberg Intelligence analyst Jennifer Rei.
Could a regulator dismiss these as unviable? It’s not that gamers would shut up if they saw a deterioration of Activision content on PlayStation. This deal could be a test of skepticism about behavioral remedies.
Cloud gaming is the gray area. This makes the business more open and competitive as players don’t need powerful (and expensive) consoles. The processing power for the software is with the cloud service provider, the game is streamed to any internet connected device with a browser or similar app for audio and video.
The fear is that buying Activision could “tilt” this new market in Microsoft’s favor before competing services gain critical mass. The American giant can then promote its own content to the detriment of small, independent game developers.
The CMA is rightly looking out for vulnerable creatives. But blocking this transaction must be based on more than the statement that Microsoft would have an unparalleled combination of content, existing users and cloud infrastructure. Solid evidence is needed that this “ecosystem” would make it very difficult for tech rivals to attack Microsoft’s territory. If a deeper probe produces it, Microsoft has a problem.
It is commendable that the UK is not letting uncertainty over market evolution weaken its resolve. However, it must be proceeded with caution. Merging parties can always appeal against a veto of a deal. Being rolled back after blocking a major tech transaction would damage the UK’s antitrust credibility.
Chris Hughes is a Bloomberg Opinion columnist on deals. He previously worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.