UK regulator blocks $68.7B Microsoft-Activision deal

Despite recent signs that it was softening its stance on Microsoft’s proposed $68.7 billion acquisition of Activision Blizzard, the U.K.’s antitrust regulator, the Competition and Markets Authority, has announced that it has decided to formally block the deal.

The CMA said its decision was motivated by concerns about the deal’s effect on the future of the nascent cloud gaming market, where Microsoft is a key player. It feared the deal would lead to “reduced innovation and less choice for UK gamers over the years to come.”

It said that a solution proposed by Microsoft “had significant shortcomings and would require regulatory oversight by CMA.”

“Microsoft has a strong position in cloud gaming services and 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,” the government body said, announcing the findings of its monthslong review.

It reckons Microsoft “accounts for an estimated 60-70% of global cloud gaming services” already, thanks to the advantages of owning Xbox, Windows, and the Azure platform, as well as the Game Pass game subscription service to which Xbox Cloud Gaming is tied. The CMA views cloud gaming as an important, fast-growing sector of the games market that allows gamers to “avoid buying expensive consoles” and presents them with more “flexibility and choice as to how they play.”

The CMA viewed the “behavioral” remedies proposed by Microsoft, in the form of 10-year deals forcing it to make its games available to other cloud platforms, as insufficient. It said they would require regulatory oversight, did not sufficiently cover different business models such as subscriptions, and risked disagreement between Microsoft and other cloud gaming providers, given the amount of change that might happen in the sector over a 10-year period.

Microsoft and Activision Blizzard immediately said they would appeal the CMA’s decision.

Responding in a statement, Microsoft president Brad Smith said, “We remain fully committed to this acquisition and will appeal. The CMA’s decision rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom. We have already signed contracts to make Activision Blizzard’s popular games available on 150 million more devices, and we remain committed to reinforcing these agreements through regulatory remedies. We’re especially disappointed that after lengthy deliberations, this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works.”

An Activision Blizzard spokesperson issued an even punchier, almost threatening response. “The CMA’s report contradicts the ambitions of the U.K. to become an attractive country to build technology businesses,” it said. “We will work aggressively with Microsoft to reverse this on appeal. The report’s conclusions are a disservice to U.K. citizens, who face increasingly dire economic prospects. We will reassess our growth plans for the U.K. Global innovators large and small will take note that - despite all its rhetoric - the U.K. is clearly closed for business.”

Both Microsoft and Activision Blizzard had been cautiously optimistic that the CMA might approve the deal, despite its initial skepticism. In March, the CMA set aside its concerns about the effect of the deal on the console market — specifically the availability of Call of Duty on PlayStation, which, thanks to ardent lobbying by Sony, had up to that point been at the forefront of regulatory concerns.

In this case, the CMA said at the time, “the merger will not result in a substantial lessening of competition in console gaming services because the cost to Microsoft of withholding Call of Duty from PlayStation would outweigh any gains from taking such action.” In other words, Sony’s dominant position in the console market motivates Microsoft to keep publishing Call of Duty there. Clearly, the CMA does not believe the same applies in the nascent cloud gaming market. Microsoft’s biggest potential rival in cloud gaming, Google, closed its cloud gaming service Stadia earlier this year.

While Microsoft and Activision begin the appeals process against the CMA’s decision, they will also be closely monitoring its effect on the position of other important global regulators. The European Union is set to announce its findings by May 22: It’s thought to be satisfied with Microsoft’s proposed remedies, but may yet be swayed by the CMA’s harder stance. In the U.S., the Federal Trade Commission is challenging the deal in its own internal court, but without federal jurisdiction, may struggle to actually block it.

That means the appeal against the CMA decision now becomes the frontline in Microsoft’s effort to close the deal before a July 18 deadline that would make it liable to pay Activision a termination fee in the billions of dollars.

Update: Activision Blizzard CEO Bobby Kotick said that the CMA’s decision “isn’t the news we wanted — but it is far from the final word on this deal” in an email to staff that was made public. He also implied that Microsoft would withhold investment in AI technologies in the U.K. if the deal wasn’t approved. You can read his full statement below:

Today, the Competition and Markets Authority (CMA), a regulatory agency in the U.K., decided not to approve our merger with Microsoft. This isn’t the news we wanted – but it is far from the final word on this deal.

Alongside Microsoft, we can and will contest this decision, and we’ve already begun the work to appeal to the U.K. Competition Appeals Tribunal. We’re confident in our case because the facts are on our side: this deal is good for competition.

The U.K. hopes to grow its leadership position in technology, and a combined Microsoft-Activision would accomplish exactly that. At a time when the fields of machine learning and artificial intelligence are thriving, we know the U.K. market would benefit from Microsoft’s bench strength in both domains, as well as our ability to put those technologies to use immediately. By contrast, if the CMA’s decision holds, it would stifle investment, competition, and job creation throughout the UK gaming industry.

This merger is a complex process, and I know I’m not the only one frustrated by the hurdles and delays. We’re accustomed to a company culture that moves quickly to accomplish big goals, so it’s tough when we can’t close things out at our usual energetic pace. We’ll keep pressing our case, because we know that this merger will benefit our employees, the broader U.K. tech workforce, and players around the world.

I’m going to do everything I personally can to advocate for us and help regulators understand the competitive dynamics in our industry. What gives me confidence is that, whether on our own or united with another company, we are one of the strongest companies in our industry, poised for continued growth, and building on our incredible IP.

I appreciate your continued hard work and focus, and for continuing to connect and engage our players around the world. This is the best time to be in our field, and you all represent the best of our industry. We’ll be sure to keep you updated on next steps as they happen.