Why did the CMA prohibit the merger?
Activision develops gaming content, with its franchises including Call of Duty, World of Warcraft and Candy Crush. The CMA prohibited the merger on the basis that Microsoft, as the most powerful operator in the cloud gaming market in the UK, would have an incentive to withhold Activision’s portfolio of games from their competitors, something which would substantially weaken competition in the cloud gaming market.
According to the CMA, Activision’s games are likely to be important for the fast-growing cloud gaming market. The CMA found that Microsoft already has a strong position in relation to cloud gaming services. Microsoft could prevent Activision’s games from being hosted on other cloud gaming platforms, thereby “reinforcing Microsoft’s advantage in the market by giving it control over important gaming content” to the detriment of current and future cloud gaming users. The potential customer benefits of the merger, namely the benefit of Activision’s content being on Microsoft’s Game Pass on the date of its release, were considered. However, the CMA decided that this benefit was ultimately outweighed by the harm to competition.
Interestingly, the CMA decided that the merger would not lead to a substantial lessening of competition in the console market. The CMA found that Microsoft’s Xbox console and Sony’s Playstation console compete closely and that Activision’s Call of Duty is important to the competitive offering of each. The CMA concluded that it was unlikely that Microsoft would make Call of Duty exclusive to Xbox after the merger; if Microsoft were to withhold the game, the benefit of gamers switching to its Xbox console would be outweighed by the loss of sales of Call of Duty to other PlayStation games.
What other outcomes did the CMA consider?
Microsoft had proposed a behavioural remedy to address the CMA’s competition concerns. This would have entailed Microsoft agreeing to licence Activision’s games, royalty-free, to certain cloud gaming providers for 10 years. This remedy was considered in detail by the CMA. Ultimately, the remedy was rejected by the CMA, noting that it presented “several shortcomings connected with the growing and fast-moving nature of cloud gaming services”. They highlighted that:
- the scope of the remedy was limited to cloud gaming providers with specific models. For example, it did not cover agreements that related to multi-game subscription models, which are increasingly popular with gamers, and it was not sufficiently open to providers who wanted to offer Activision’s games on operating systems other than Windows.
- Microsoft’s proposal to standardise terms and conditions on which games were offered prevented competition and dynamism in the market
- the complexity of the remedy, in a rapidly evolving and dynamic market, meant that there was a high risk of it being circumvented and it would be difficult to monitor it effectively
Microsoft and Activision’s reaction
Microsoft and Activision have both reacted strongly to the CMA’s decision and have stated that they intend to appeal to the Competition Appeal Tribunal (CAT).
An Activision spokesperson stated the conclusions of the CMA’s report are “a disservice to UK citizens who face increasingly dire economic prospects. We will reassess our growth plans for the UK despite all its rhetoric- the UK is clearly closed for business.”
Microsoft has said that it remains fully committed to the deal, stating that the CMA’s decision suggests “a flawed understanding of this market and the way in which the relevant cloud technology actually works” and that the decision “rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the UK”.
If the parties appeal to the CAT, the CAT will not engage with the merits of the CMA’s decision or conduct a wholesale review of the parties’ evidence. Instead, a judicial review standard will apply, meaning the CAT will decide whether the CMA acted irrationally, illegally or with procedural impropriety. This is a high threshold to meet. If the appeal succeeds, the case will be remitted to the CMA for a fresh review, although without new evidence or a material change in circumstances, it is likely that the CMA would reach the same conclusion.
The transaction is also subject to review by the European Commission and the US Federal Trade Commission (FTC). It remains to be seen whether the European Commission adopts a similar approach to the CMA, or whether its approach will diverge. The FTC has filed a complaint to block the deal, which Microsoft has said it will challenge.
This is the second time that the CMA has intervened to prohibit a global merger in the digital sector, with the Microsoft / Activision decision following hot on the heels of the CMA’s decision (in October 2022) to prohibit Meta’s acquisition of Giphy. This is a strong indication that the digital sectors remain a top priority for the CMA, as well as demonstrating that, post-Brexit, the CMA is ready to “step up” and block or unwind large, global transactions when it considers that it’s necessary to do so. It’ll be interesting to see how these themes play out in the CMA’s review of Adobe Inc’s $20 billion acquisition of cloud-based designed platform Figma (announced on 3 May 2023), as well as its review (announced on 6 April 2023) of Amazon’s acquisition of iRobot Corporate.
The decision should also be viewed in the wider regulatory context of a marked step change towards the regulation of the digital sector in the UK. This includes:
- proposed legislative changes that will see important and far reaching changes to the way in which digital companies are regulated in the UK: the new Digital Markets Competition and Consumer Bill was introduced into Parliament on 26 April 2023, under which the CMA’s Digital Markets Unit will obtain new powers to proactively regulate digital businesses designated as having “strategic market status”.
- the CMA also announced on 4 May 2023 that it will conduct an initial review of competition and consumer protection considerations in the development and use of AI foundation models. The initial review will examine how the competitive markets for foundation models and their use could evolve; explore what opportunities and risks these scenarios could bring for competition and consumer protection; and produce guiding principles to support competition and protect consumers as AI foundation models develop. The CMA has stated that it will publish its findings in September 2023.
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