The UK government's Competition and Markets authority has moved to prevent Xbox's acquisition of Activision Blizzard.
Announced on the government's website, the decision to block the deal was due to the implications for cloud gaming. "The deal would alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for UK gamers over the years to come," the CMA said.
Microsoft has retaliated by saying it will appeal the decision, saying it is "disappointed" by the result that "appears to reflect a flawed understanding of this market".
"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"
Brad Smith, vice chair and president of Microsoft, 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"
Microsoft's inadequate solution.
The CMA said Microsoft failed to provide a solution to its concerns over the deal's impact on the cloud gaming market. While the CMA deemed that Xbox making Activision Blizzard games like Call of Duty exclusive to its consoles wouldn't make sense, it didn't reach the same decision about cloud gaming.
"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," it said.
"The deal would reinforce Microsoft’s advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch, and World of Warcraft. The evidence available to the CMA indicates that, absent the merger, Activision would start providing games via cloud platforms in the foreseeable future."
"The deal would reinforce Microsoft’s advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch, and World of Warcraft."
The CMA raised these concerns in its provisional findings in February, giving Microsoft an opportunity to present a solution like it did with the console exclusivity concerns. The cloud gaming solution had three major shortcomings according to the CMA:
- It did not sufficiently cover different cloud gaming service business models, including multigame subscription services.
- It was not sufficiently open to providers who might wish to offer versions of games on PC operating systems other than Windows.
- It would standardise the terms and conditions on which games are available, as opposed to them being determined by the dynamism and creativity of competition in the market, as would be expected in the absence of the merger.
The CMA believed that, if the deal was approved, there would be a significant risk of disagreement between Microsoft and other cloud gaming service providers, especially if a ten year agreement was put in place given how fast the market is evolving.
It therefore deemed it would have to regulate the ramifications of the deal going forward to ensure that everything was proceeding properly. Preventing the merger would allow market forces to continue to operate as they have been and wouldn't require further intervention from the CMA.
Preventing a head start.
The CMA highlighted that Microsoft is already in a strong position when it comes to cloud gaming, through its aptly named Xbox Cloud Gaming, and granting it access to the likes of Call of Duty and other Activision Blizzard titles would deter and potentially stop competitors from entering the market.
"Cloud gaming is growing fast with the potential to change gaming by altering the way games are played, freeing people from the need to rely on expensive consoles and gaming PCs and giving them more choice over how and where they play games. This means that it is vital that we protect competition in this emerging and exciting market," said chair of the independent panel of experts conducting the Xbox investigation Martin Coleman.
"Microsoft already enjoys a powerful position and head start over other competitors in cloud gaming and this deal would strengthen that advantage giving it the ability to undermine new and innovative competitors.
"Microsoft engaged constructively with us to try to address these issues and we are grateful for that, but their proposals were not effective to remedy our concerns and would have replaced competition with ineffective regulation in a new and dynamic market.
"Cloud gaming needs a free, competitive market to drive innovation and choice. That is best achieved by allowing the current competitive dynamics in cloud gaming to continue to do their job."
Microsoft Acquires Activision Blizzard: The Story So Far
Far from the final word.
Activision Blizzard CEO Bobby Kotick said in an open letter to staff that, while the CMA's decision to block the deal wasn't good news for the companies, "it is far from the final word".
Kotick vowed to join Microsoft in contesting the decision and said it has already begun the work to appeal it in the UK Competition Appeals Tribunal. "We're confident in our case because the facts are on our side: this deal is good for competition".
He continued: "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 UK 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."
Kotick's message was reiterated in an Activision Blizzard statement provided to IGN. "The CMA’s report contradicts the ambitions of the UK to become an attractive country to build technology businesses. We will work aggressively with Microsoft to reverse this on appeal.
"The report’s conclusions are a disservice to UK citizens, who face increasingly dire economic prospects. We will reassess our growth plans for the UK. Global innovators large and small will take note that – despite all its rhetoric – the UK is clearly closed for business."
A long time coming.
The CMA's decision is perhaps the most pivotal milestone in Xbox's acquisition of Activision Blizzard so far and has certainly been a long time coming. The UK government department announced it would be conducting an investigation into the $68.7 billion deal last summer with its progression being watched carefully by the entire industry.
Microsoft and Sony were naturally the most involved, with the investigation causing both companies to share information and opinions neither had previously. Sony said the deal would have "major negative implications for gamers" and was naturally concerned for its own business if certain games became Xbox exclusives, but Microsoft countered by saying that PlayStation was too big to fail and will still have way more exclusives anyway.
Responses from both companies, other relevant parties, and the public led to an overwhelming amount of evidence for the CMA, who announced in January that it would have to extend the investigation as a result. A provisional report released the following month had Microsoft and Activision Blizzard concerned, however, as the CMA said several issues could arise if the deal went through, including higher prices, fewer choices, and less innovation for UK gamers.
A lot of the conversation revolved around Call of Duty exclusivity, but Microsoft reportedly offered Sony a ten year deal to guarantee the franchise would continue to appear on PlayStation, and Xbox boss Phil Spencer also said it would continue to appear on the platform indefinitely.
Sony still said this would "irreparably harm competition" and raised concerns over Microsoft sabotaging Call of Duty on PlayStation, but other companies seemed more on board as Microsoft signed similar deals with Nintendo, Ubitus, and more.
These deals perhaps worked in its favour, as the CMA investigation took a major step forward in Microsoft's direction as an update in March said it's now less concerned about the deal going through, which Sony called "surprising, unprecedented, and irrational." Regardless, however, the decision has now gone the opposite way.
Microsoft's acquisition of Activision Blizzard may have reached its conclusion in the UK, and even if it's appealed successfuly, the deal is still being investigated and debated elsewhere.
The European Union has reportedly hit Microsoft with a formal antitrust warning and the United States' Federal Trade Commission also sued to block the acquisition, with a trial set for later this year.
It's also faced scrutiny from various U.S. senators, the city of New York, and the U.S. Justice Department, though Spencer has remained confident about the deal throughout, even if it has been a learning process.
Editor's note: This article was updated to include Bobby Kotick's open letter and Activision Blizzard's statement to IGN.
Ryan Dinsdale is an IGN freelancer and acting UK news editor. He'll talk about The Witcher all day.