Microsoft Needs UK Court Win to Close Activision’s Deal

Microsoft’s $75 billion Activision deal is facing significant hurdles in both the UK and the US. In these jurisdictions, the companies need to win in the courtrooms if they want to close the deal. The interpretation of the remedies pertaining to the distribution of cloud gaming services could change the fate of the deal.

Rationale of the Deal

This acquisition will provide Microsoft with a valuable array of gaming content, including renowned titles such as Call of Duty, World of Warcraft, and Candy Crush. This assortment of content will facilitate Microsoft’s implementation of a cross-platform strategy, enabling players to enjoy gaming experiences across various devices. The video gaming industry, with an estimated value of $220 billion, is currently undergoing a significant transition from a console-centric approach dominated by Sony (PlayStation, accounting for 20-40% of market share by sales value), Microsoft (Xbox, accounting for 20-30% of market share by sales value), and Nintendo (Switch, accounting for 30-40% of market share by sales value). The industry is now embracing a cross-platform, cloud-based strategy wherein consumers have the ability to stream games on multiple devices, such as smart TVs, mobiles, tablets, and PCs.

Although the cloud gaming sector is still in its early stages, it is experiencing rapid growth, with expectations of reaching a market value of GBP 1 billion in the UK by 2026. As the market expands, new players like Nvidia, Amazon, and Boosteroid are actively seeking to solidify their positions in the industry.

Challenges

Despite receiving approvals from the European Union, China, Japan, and several other countries, the Federal Trade Commission (FTC) in the US and the Competition and Markets Authority (CMA) in the UK have raised concerns and either blocked or sought to block the deal through legal means. While the concerns raised in the US primarily revolve around potential anticompetitive implications within the console market, an aspect that does not appear to trouble other regulatory bodies due to the robust competition exerted by Sony (PlayStation), the concerns in the UK are centered on the provision of cloud gaming services.

According to the UK regulator, post-merger, Microsoft would possess the capacity and incentive to restrict the access of other cloud gaming services to Activision’s games and exclusively distribute them through Microsoft’s own cloud services. This, according to the regulator, would inevitably lead to reduced competition.

Interestingly, the European Union also expressed concerns regarding the supply of cloud gaming services. However, the remedies proposed by Microsoft were satisfactory to assuage the regulators’ worries in the EU, in contrast to the UK, where the provided remedies were deemed inadequate in addressing these concerns.

Scope of the remedies

Microsoft proposed behavioral remedies (free licesing agreements) in both Europe and the UK. However, it is important to note that the scope of these remedies may differ between the two regions.

In Europe, Microsoft offered a comprehensive solution by providing a 10-year free license to consumers in the European Economic Area (EEA). This license would enable them to stream all current and future Activision Blizzard PC and console games via any cloud game streaming service of their choice. Additionally, Microsoft extended a corresponding free license to cloud game streaming service providers, allowing EEA-based gamers to stream Activision Blizzard’s games through their preferred platforms.

On the other hand, Microsoft’s offering in the UK involved a 10-year royalty-free license, but it was limited to certain cloud gaming providers rather than encompassing all providers as in the European Union. Microsoft forged agreements with specific providers such as Nvidia, Boosteroid, and Ubitus for the distribution of games across different cloud gaming services in the UK. For consumers, the license is perpetual; however, the games must be played on eligible streaming services. Moreover, when it comes to PC games, they need to be purchased from authorized game stores. The CMA concluded that these limitations, along with others, would still curtail the ability of cloud gaming services to effectively compete with Microsoft.

In summary, while Microsoft’s remedies in Europe covered a broad range of stakeholders and provided greater flexibility, the UK remedies were more restricted, leading the Competition and Markets Authority (CMA) to determine that they would impede effective competition among cloud gaming services.

Timing

Microsoft challenged the CMA’s decision before the Competition Appeal Tribunal (CAT) on May 26. The CAT will likely call for a case management conference in 3Q to shed light on the many procedural issues of the case, but it is unlikely to make any determinations on the substance of the case. Given the complexity of the case, and the volume of evidence the court will have to review, a final decision isn’t likely before the end of the year. In the US, the FTC challenged the merger in December 2022, and an evidentiary hearing is scheduled for Aug. 2, 2023 before an Administrative Law Judge at the FTC’s headquarters.