Microsoft is furious. Last week, a surprise decision by the UK’s Competition and Markets Authority (CMA) blocked its $68.7 billion deal to acquire Britain’s Activision Blizzard, due to concerns over the future of the cloud gaming.
Microsoft President Brad Smith was awake at 2 a.m. that morning hastily writing a response from across the pond, according to Bloomberg. He spoke to the BBC a day later and called the UK regulator’s decision “the darkest day” for Microsoft in its four decades working in Britain. He went further and said that “the European Union is a more attractive place to start a business” than the UK, a particularly scathing statement given the political issues surrounding Brexit.
Now Microsoft is bruised, angry and plotting its next move. If Brad Smith’s fight talk is any indication, Microsoft will try to keep this deal alive. But the CMA’s decision won’t be easy to appeal.
UK regulators have cracked down on mergers and acquisitions in recent years, coinciding with the UK’s exit from the European Union. To challenge its latest decision, Microsoft will have to file a notice with the Competition Appeals Tribunal (CAT), a process that can take months. He will have to convince a panel of judges that the AMC acted irrationally, illegally or with procedural impropriety or injustice. And the odds of winning are slim. “The CMA has won 67% of all merger appeals since 2010,” Nicole Kar, a partner at law firm Linklaters, wrote in 2020. I spoke to Kar after the Microsoft CMA ruling, and she confirmed that the CMA still wins the majority of any appeals.
Meta’s battle with the CMA over its acquisition of Giphy shows what Microsoft could expect. Meta was originally ordered to sell Giphy in 2021, but appealed the decision and was unsuccessful. Meta eventually had to comply with the UK competition watchdog and divest itself of the Giphy social media GIF library. Viagogo’s $4 billion takeover of StubHub was also partially blocked by the CMA, forcing the company to retain StubHub’s US and Canadian operations but sell its UK and international operations.
Microsoft clashed with the CMA during the review process, publicly criticizing the regulator’s calculations and forcing it to correct ‘obvious errors’ in its financial calculations regarding the holdback Call of Duty from PlayStation.
These errors forced the CMA to take a rare U-turn with its interim findings, dropping concerns around Call of Duty and the impact of Microsoft’s deal on console competition. Crucially, though, it kept cloud gaming issues open – which led to the deal stalling. Sony, which has become a leading opponent (alongside Google) to Microsoft’s acquisition of Activision, called the CMA’s initial U-turn a “surprising, unprecedented and irrational” decision, but the maker of PlayStation has yet to comment on the regulator’s decision. decision to block the case.
The CMA said in September that it was concerned about the effects of Microsoft’s ownership of Activision Blizzard games on existing rivals and new entrants offering multi-game subscriptions and cloud gaming services. I tweeted at the time than all the headlines around Call of Duty were just noise, and there would be greater concerns about Microsoft’s ability to leverage Windows and Azure, unlike its competitors, and how it might influence game distribution and revenue share in the gaming industry with its Xbox Game Pass subscription.
Microsoft knew cloud gaming would be a big concern, and that’s why it’s spent the past two months preparing by signing deals with Boosteroid, Ubitus, and Nvidia to allow Xbox PC games to run on cloud gaming services. competitors. These 10-year agreements will also include access to Call of Duty and other Activision Blizzard games if Microsoft’s deal is approved by regulators. If not approved, offers are void for Activision games, with only access to Xbox PC games from Microsoft provided.
But these agreements did not convince the United Kingdom. The CMA says they are “too narrow in scope” with models that mean players must acquire the right to play games “by purchasing them from certain stores or subscribing to certain services”. There are also concerns that Microsoft potentially retains all revenue from Activision game sales and in-app purchases or that cloud providers may not be able to provide access to these games in competing multi-game subscription services or to offer them on computer operating systems other than Windows.
Limiting support for Windows would make Microsoft rival customers of cloud gaming services, helping the software giant secure its dominance in operating systems if there was a bigger shift to cloud gaming. Valve’s SteamOS poses the only realistic threat to Windows gaming dominance right now, and whether cloud providers should allow Windows to run games like Call of Dutyso we’re unlikely to see the switch to Linux that Google tried to push with its failing Stadia cloud gaming service.
The major part of this agreement now rests on the shoulders of the European Union. The cloud deals Microsoft has signed are also designed to appease EU regulators. Reuters reported last month that the Activision deal would likely be approved by EU regulators following Nvidia and Nintendo licensing deals. The EU is due to make a decision by May 22 and Microsoft is once again trying to get ahead of regulators by signing a new deal with European cloud gaming platform Nware. Nvidia and Boosteroid, which both signed Microsoft’s 10-year cloud deal, have publicly questioned the CMA’s decision, with Microsoft hoping this kind of support will sway EU regulators.
An EU approval could offer a silver lining for Microsoft’s giant deal, as such a move would put pressure on the UK as the only major market to outright block the acquisition. Regulators in Saudi Arabia, Brazil, Chile, Serbia, Japan and South Africa have already approved the deal. However, Microsoft is facing problems closer to home.
In the United States, the Federal Trade Commission filed a lawsuit to block Microsoft’s deal with Activision Blizzard late last year. The FTC case is still in the discovery of documents stage, with an evidentiary hearing scheduled for August 2. Microsoft and Sony attorneys are already arguing over what (and how many) documents need to be presented as part of the discovery process, and we’re months away from knowing how the case will play out.
Microsoft has always maintained that the deal will be completed by the end of its 2023 fiscal year, which is the end of June. But that timeline seems incredibly unrealistic now, given the AMC’s intervention. We will certainly see some fighting from Microsoft in the coming weeks, but if EU regulators share the same concerns as the CMA, it will almost certainly be game over for Microsoft. It’s hard to imagine he’s really prepared to battle it out in court for months or years with multiple regulators in Europe, all while facing the prospect of the FTC trying to break the deal. So for the next few weeks, all eyes are now on Brussels.
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