Call of Duty was a red herring: Why cloud gaming is the real problem for Microsoft and Activision

Microsoft and Activision Blizzard, looking to finalize the $68.7 billion merger of the two companies, have spent a ton of energy placating regulators on the issue of Call of Duty. If approved, the deal would bring one of gaming’s biggest franchises under the already thriving Xbox ecosystem. Regulators and rival platform holders — namely, Sony, which has aggressively lobbied global governments in an effort to shut down the acquisition — have fretted about the potential for console exclusivity that would stifle competition. U.K. regulators in late March seemingly set aside the issue of potential Call of Duty exclusivity in what originally looked to be a tipping point in favor of the deal.

And so, it surprised onlookers when the U.K. antitrust regulator, the Competition and Markets Authority, moved to block the deal on April 26, citing concerns over its impact on the cloud gaming market. The CMA’s worries about cloud gaming aren’t new. The regulator outlined them in its provisional findings report from earlier this year, but the public focus remained squarely on Microsoft potentially making Call of Duty games exclusive to Xbox. Cloud gaming is indeed a relatively young market, but its impact goes beyond which games you can stream to your phone via Game Pass. The big picture of cloud gaming includes everything around how information is stored, saved, distributed, and accessed.

Cloud gaming is considered a nascent market in a formative period that’s defining how the new technology will be adopted by players. Companies have been toying with cloud gaming for more than 20 years, but the technology hasn’t advanced enough to bring it to a wider audience — until recently, that is. U.K. regulators have positioned cloud gaming as a way to make gaming more accessible, moving consumers away from expensive, high-end hardware and allowing tech-intensive video games to run on devices people that already have access to, like phones or laptops. (Beyond what U.K. regulators believe, the technology does have that potential.)

Nvidia’s GeForce Now service, which debuted in a limited capacity in North America in 2014, is one of the early forces in cloud gaming. Microsoft, Google, and Amazon all followed suit with their own cloud streaming initiatives. With Google Stadia’s attempt to corner the market having failed, and Amazon’s Luna platform still niche, Microsoft has dominated the market, using cloud gaming as a small but significant feature of its Game Pass subscription service, which gives customers access to hundreds of games for a monthly fee. Plenty of those games are available to be played on the cloud. (Amazon, meanwhile, has a huge stake and dominance in cloud services via its Amazon Web Services division.) U.K. regulators estimate that Microsoft has a 60-70% hold on the global cloud gaming market, and said the company “has other important strengths in cloud gaming from owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming).”

The Activision Blizzard merger would give Microsoft more control over the market and over how its popular games are played — the likes of Call of Duty, Overwatch, and World of Warcraft, the CMA said — and potentially allow the company to exercise exclusivity rights over streaming platforms.

Microsoft is able to leverage the power of its Azure infrastructure to support Xbox Cloud Gaming; Bloomberg reported in December that Microsoft owns “more than 200 data centers” specific to Azure, “which support the lower-latency cloud gaming services for its stable of titles on Game Pass.” Sony, which has had its market position scrutinized by regulators, is well behind Microsoft in how it supports its own subscription service, PlayStation Plus. While PlayStation Plus gives subscribers access to cloud gaming, its offerings are paltry in comparison to Game Pass’ streaming options.

“The cloud allows UK gamers to avoid buying expensive gaming consoles and PCs and gives them much more flexibility and choice as to how they play,” the CMA wrote. “Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities.”

Microsoft attempted to address these concerns by signing a deal with Nvidia to bring Microsoft’s PC games to GeForce Now. (The company signed similar deals with smaller cloud gaming services like Boosteroid and Ubitus.) Activision Blizzard’s games will be included as well, should the merger go through. Nvidia had previously expressed concern over the merger, citing the hindrance of competition. The 10-year deal between Microsoft and Nvidia appears to quell that concern, at least for Nvidia — but perhaps not U.K. regulators — as Activision Blizzard games would seemingly remain available on GeForce Now. Microsoft cited this agreement in its response to the CMA’s provisional findings in March, calling the concerns “misplaced.”

Joost Rietveld, associate professor of strategy and entrepreneurship at the University College London School of Management, filed a public comment after the CMA’s adjusted findings in March in which he attempted to define cloud gaming — specifically, whether it’s a “distinct market.” Rietveld argued that cloud streaming has four different services: “as a feature,” “as a platform,” “as a complement,” and “as an input.” Each is a “different scope,” he said, and all categories “arguably do not compete.” (Some may compete, like cloud gaming’s potential uses “as a feature” and “as a platform.” Sony and Microsoft, with PlayStation Plus and Game Pass, respectively, do compete in the “as a feature” category, going by Rietveld’s descriptions.) Rietveld concluded that cloud gaming can’t be collapsed into a single market definition, and the CMA should not view it as such. It seems like the CMA disagreed.

Moments after the CMA released its decision, Microsoft and Activision Blizzard both promised to appeal the decision. Microsoft president Brad Smith accused the CMA of having a “flawed understanding of this market and the way the relevant cloud technology actually works.” An Activision Blizzard spokesperson added: “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.”

Microsoft and Activision are still awaiting a decision from the U.S. Federal Trade Commission, which sued to block the deal. The FTC, like the CMA, is concerned about Microsoft’s established dominance in the cloud gaming sector and about how the Activision Blizzard acquisition, with its massive library of popular games, would impact the market. In March, the FTC issued a motion looking for documents related to Microsoft’s cloud gaming business.