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Why the UK competition watchdog wants to investigate Microsoft’s Activision deal

UK’s CMA feels the Microsoft, Activision deal could reduce competition in “gaming consoles, multi-game subscription services, and cloud gaming services.”

“Microsoft is 1 of 3 large companies, together with Sony and Nintendo, that have led the market for gaming consoles for the past 20 years with limited entries from new rivals. Activision Blizzard has some of the world’s best-selling and most recognisable gaming franchises, such as Call of Duty and World of Warcraft. The CMA is concerned that if Microsoft buys Activision Blizzard it could harm rivals, including recent and future entrants into gaming, by refusing them access to Activision Blizzard games or providing access on much worse terms,” the UK’s Competition and Markets Authority (CMA) stated on September 1 following its initial investigation into Microsoft’s proposed acquisition of Activision.

Earlier in January 2022, Microsoft announced that it wants to acquire Activision Blizzard for a record $68.7 billion, by far the biggest deal in gaming. CMA believes that the deal “could substantially lessen competition in gaming consoles, multi-game subscription services, and cloud gaming services (game streaming)” and has given Microsoft and Activision until September 8 to explain why CMA should not pursue a further investigation into the deal. Microsoft is also likely to face challenges in front of other global regulators, and CMA’s concerns will also shed light on what other regulators might be thinking about the deal.

Update (September 16): CMA has decided to pursue phase 2 investigation after Microsoft declined to offer acceptable undertakings to address the competition concerns.

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Microsoft responded to CMA’s concerns in a blog post stating that it will not stop providing games like Call of Duty to other platforms and that it “will continue to engage with regulators with a spirit of transparency and openness as they review this acquisition.”

“We respect and welcome the hard questions that are being asked. The gaming industry today is robust and dynamic. Industry leaders, including Tencent and Sony, continue to expand their deep and extensive libraries of games as well as other entertainment brands and franchises, which are enjoyed by players everywhere. We believe that a thorough review will show that the combination of Microsoft and Activision Blizzard will benefit the industry and players.” – Microsoft

What are CMA’s concerns?

Could harm current and future competition in the already concentrated gaming market: In a summary of its phase 1 investigation, CMA noted that Microsoft (Xbox), Sony (PlayStation) and Nintendo (Switch being the current generation console) have been the only significant suppliers of console gaming with little or no entry from new rivals. CMA is worried that the proposed deal might reduce either current or future potential competition.

Microsoft could withhold games like Call of Duty from others: One of CMA’s main concerns is that Microsoft might withhold or degrade Activision’s content—including popular games such as Call of Duty—from other consoles or multi-game subscription services. “Call of Duty, in particular, is widely regarded as one of the most successful gaming franchises of all time. For more than a decade, its releases have ranked in the top games available on console and are expected to continue to do so,” CMA observed. “Microsoft has followed this approach in several past acquisitions of gaming studios, where it made future game releases from those studios exclusive in consoles to Xbox (such as the upcoming Starfield and, based on Microsoft’s public statements, Elder Scrolls VI from Bethesda, a studio Microsoft acquired as part of its USD 7.5 billion acquisition of ZeniMax in 2021),” CMA explained.

If something like this happens with Activision, CMA believes that the main rival that could be affected would be Sony. “PlayStation currently has a larger share of the console gaming market than Xbox, but the CMA considers that Call of Duty is sufficiently important that losing access to it (or losing access on competitive terms) could significantly impact Sony’s revenues and user base. This impact is likely to be felt especially at the launch of the next generation of consoles, where gamers make fresh decisions about which console to buy. The CMA believes that the Merger could, therefore, significantly weaken Microsoft’s closest rival, to the detriment of overall competition in console gaming,” CMA stated.

Microsoft, however, has responded by saying that:

“We’ve heard that this deal might take franchises like Call of Duty away from the places where people currently play them. That’s why, as we’ve said before, we are committed to making the same version of Call of Duty available on PlayStation on the same day the game launches elsewhere.”

Existence of strong network effects: “Part of the difficulty in entering and expanding in the console gaming market is the existence of strong network effects. Console providers such as Microsoft compete to attract users who want to play high-quality games, often with friends, as well as high-quality content from game developers, who want to make games for consoles with a large user base. Consoles with a lot of gamers attract better content, which in turn attracts more gamers to that console, which in turn attract better content, and so on. This self-reinforcing mechanism makes it more difficult for new entrants without a large user base or good pre-existing gaming content to enter and grow in the market,” CMA observed.

Effect on the up-and-coming cloud gaming and subscription models: CMA explained that, in recent years, there has been a growth in cloud gaming, where complex games can be accessed on remote servers and streamed directly to a device, and multi-game subscription services, which allow gamers to access a catalogue of games for a fixed monthly fee. “The CMA believes that the shift to cloud gaming services and multi-game subscription services is opening a window of opportunity for new entrants. To succeed, these new entrants will need to offer a strong gaming catalogue that will attract users. Cloud gaming service providers will also need access to cloud infrastructure and an operating system (OS) license (especially Windows OS, which is the operating system for which most PC games are designed),” CMA noted. The regulator is concerned that Microsoft might leverage its broader ecosystem of console, cloud, and PC operating systems together with Activision’s game catalogue “to strengthen network effects, raise barriers to entry and ultimately foreclose rivals in cloud gaming services.”

“By having a large and well-distributed cloud infrastructure, Microsoft will be able to host games on its servers on preferential terms and reach gamers throughout the world without having to pay a fee to third-party cloud platforms. By having Windows, the OS where the vast majority of PC games are played, Microsoft can stream games from Windows servers without having to pay an expensive Windows licensing fee and may be able to design and test games made for Windows more effectively than rivals. And by having an existing console ecosystem, Microsoft has an existing user base of gamers to which it can promote its cloud gaming services, as well as a range of popular games that it can offer. The Merger would, therefore, bring together the company in a uniquely strong position to offer cloud gaming services with one of the industry’s strongest gaming catalogues,” CMA explained.

Why not everyone is convinced by CMA’s arguments?

Not all are convinced of CMA’s reasons for holding up the deal. Tom Warren, Senior Editor at The Verge, for instance, tweeted that CMA’s decision will protect Sony’s dominance in the gaming industry:

Warren argued that there are more significant concerns that Call of Duty that CMA might have overlooked:

Microsoft, in its response, argued that the deal will allow it to give more choice to users as opposed to CMA’s argument that it might reduce competition:

“Today, the largest and fastest growing segment of gaming is mobile platforms. To reach the billions of players where they are and no matter what device they play on, we need to embrace choice. […] We are expanding choice in two ways: through the creation of Game Pass, which gives players a subscription option; and by bringing more games to mobile platforms, including through our cloud game streaming technology. Subscription services like Game Pass make gaming more affordable and help players from all over the world find their next favorite game. Game Pass empowers developers to bring more games to more players, not fewer. We intend to make Activision Blizzard’s much-loved library of games – including Overwatch, Diablo and Call of Duty – available in Game Pass and to grow those gaming communities.”

What will happen in the next phase of the investigation?

“At Phase 2, the CMA appoints an independent panel to examine the deal in more depth and evaluate whether it is more likely than not that a substantial lessening of competition will occur as a result of the merger – a higher threshold than Phase 1. It typically builds on the work and evidence from Phase 1 with more third-party engagement via requests for information and use of its statutory powers in gathering internal documents. At Phase 2, the CMA will also carry out further in-depth review of the merging parties’ internal documents which show how they view competition and the market,” CMA explained.

This post is released under a CC-BY-SA 4.0 license. Please feel free to republish on your site, with attribution and a link. Adaptation and rewriting, though allowed, should be true to the original.

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