The Microsoft / Activision saga - a real game changer?
When Microsoft Corporation (Microsoft) first announced its intention, in January 2022, to acquire Activision Blizzard, Inc. (Activision), some regulatory scrutiny was almost inevitable. However, few will have anticipated the regulatory saga that was to follow in the UK and persists in the US. After almost two years, the UK’s principal competition regulator, the Competition and Markets Authority (CMA), has cleared a modified version of the original deal. This follows the decision of the European Commission (EC), on 15 May 2023, to clear the deal, subject to conditions. The quest for clearance is ongoing in the US.
The acquisition raises concerns about Microsoft becoming dominant in cloud gaming (ie streaming games on-demand from a remote server), and the potential impact on the future of the nascent cloud gaming market. In this article, we briefly consider the potential impact of the clearance decisions in the UK/EU on the future of cloud gaming and highlight the points that companies in any sector need to bear in mind when contemplating M&A activity.
Rise of cloud gaming
The concept of cloud gaming, which runs on remote servers and streams to a user’s device without the need for computer hardware or games to be installed on the user’s device, has been around for over 20 years. It depends on reliable, high speed internet connections. Significant improvements in internet speed and reliability in recent years have made cloud gaming increasingly popular. With rising demand, the cloud gaming market is expected to grow significantly in coming years. Key market players include Microsoft (which launched Xbox Cloud Gaming (previously Project xCloud) in September 2020), Amazon, Google, Intel, Nintendo, Nvidia, Sony, Tencent and Ubisoft.
About the deal
Both Microsoft and Activision develop and publish games for PCs, consoles and mobile devices, and distribute games for PCs. Microsoft’s Xbox Cloud Gaming allows users to play hundreds of console games on the devices they already have. Activision is one of the world’s most successful video game producers.
Microsoft’s aim in acquiring Activision is to make more games (including blockbuster franchises) available in more places. At a cost of $68.7 billion, Activision represents Microsoft’s biggest acquisition (almost three times as large as its purchase of LinkedIn in 2016) and the largest in video gaming history. Activision will be Microsoft’s third games publishing organisation (alongside its Xbox and Bethesda (makers of Elder Scrolls, Fallout, etc)), and add blockbuster franchises like Call of Duty, World of Warcraft and Candy Crush Saga to Microsoft’s portfolio.
Competition law considerations
It is possible that, as a result of the acquisition of Activision, Microsoft could harm competition in:
- the distribution of console and PC video games, including multi-game subscription services and cloud game streaming services; and
- the supply of PC operating systems.
After an in-depth investigation, the European Commission concluded that Microsoft would not be able to harm rival consoles and rival multi-game subscription services but could harm competition in the distribution of games via cloud game streaming services and that its position in the market for PC operating systems would be strengthened.
To address the competition concerns identified by the EC in the market for the distribution of PC and console games via cloud game streaming services, Microsoft offered the following commitments, with a 10-year duration:
- A free license to consumers in the European Economic Area (“EEA”) that would allow them to stream, via any cloud game streaming services of their choice, all current and future Activision PC and console games for which they have a license.
- A corresponding free license to cloud game streaming service providers to allow EEA-based gamers to stream any Activision PC and console games.
The EC considers that the licences will increase competition by bringing Activision’s games to new platforms (including smaller EU players) and more devices than before and boost the development of cloud game streaming technology in the EEA.
Such behavioural remedies are more difficult to monitor than structural remedies (like divestment). The CMA did not consider that the proposed licensing remedies were sufficient to address its concerns that the acquisition could be expected to result in a substantial lessening of competition in the supply of cloud gaming services in the UK, based on Microsoft already holding a strong position in relation to cloud gaming.
In August 2023, the CMA launched a new merger investigation into a new deal whereby Microsoft agreed to sell Activision’s cloud gaming rights (including games such as Candy Crush, Call of Duty, Overwatch and World of Warcraft) to Ubisoft Entertainment SA (Ubisoft). The CMA described this as a ‘game changer’ that will “stop Microsoft from locking up competition in cloud gaming as this market takes off, preserving competitive prices and services for UK cloud gaming customers.”
As a consequence of regulatory intervention in the UK/EU, Microsoft’s acquisition of Activision will exclude Activision’s cloud streaming rights outside of the EEA. Activision’s global cloud streaming rights (excluding the EEA) for all current and future Activision PC and console games released during the next 15 years will be divested to Ubisoft. In addition, Ubisoft will receive a non-exclusive licence for Activision’s EEA cloud gaming rights to enable it to stream and sub-license streaming of Activision games in the EEA.
Takeaways
For the gaming industry, Microsoft’s acquisition of Activision emphasises the increasing importance of cloud gaming. Microsoft’s willingness to sell the streaming rights to Activision content may raise questions for some about the role of streaming within the future of gaming. But for companies looking to enter or expand in the gaming market, the licensing remedies may (to some extent) serve to facilitate this.
From a broader commercial perspective, the acquisition demonstrates the potential value of strategic acquisitions in diversifying offerings and gaining a competitive advantage. At the same time, it serves as an important reminder that where merger control rules apply, companies need to be prepared to face regulatory scrutiny and, where competition concerns arise, accept that the outcome of such scrutiny could impact on the structure and operations of the merged entity.
The different approaches adopted by the CMA and the EC demonstrate that, as a result of Brexit, the level and nature of scrutiny and, where concerns arise, appropriate remedies may differ between the UK and the EU (although cases of significant divergence between the UK and the EU are rare). In this instance, the CMA and the EC both ultimately decided to clear the transaction subject to conditions. The real game changers, where the CMA and the EC settle on substantially different decisions, are arguably yet to come.