On April 26, 2023, the UK’s Competition and Markets Authority (CMA) blocked Microsoft’s $68.7 billion acquisition of Activision Blizzard over concerns the deal “would alter the future of the fast-growing cloud gaming market.”1 The deal was announced in January 2022 and would have been the industry’s largest ever. The U.S. Federal Trade Commission (FTC) is currently litigating to block the merger, arguing the deal would harm competition both in cloud gaming and consoles, while other regulators, including the European Commission (EC), are still reviewing the deal.
The CMA’s decision focused on competitive effects on the cloud gaming market, particularly in light of Microsoft’s “pre-Merger advantages over current and potential cloud gaming rivals.”2 The CMA stated that Microsoft has a strong position across the ecosystem, including Windows and Xbox operating systems, Azure cloud infrastructure, and its preexisting gaming content (both first party and third party), and would therefore be incentivized to make Activision games exclusive on its platform.3 The CMA further reasoned that Microsoft’s foreclosure efforts were likely to be successful based on a number of factors, including the critical nature of content in the gaming industry and the prohibitive barriers to entry, especially in cloud gaming. Finally, the CMA concluded that an effective foreclosure campaign by Microsoft would result not only in the substantial lessening of competition vis-á-vis competing cloud computing providers, but it would also substantially lessen competition for competing operating systems, especially because Microsoft’s proposed commitments would require “any cloud gaming service wishing to stream these games to use, or be compatible with, the Windows OS version of those games.”4
Microsoft’s Remedies Are Insufficient
Absent the merger, Activision would start providing games via cloud platforms in the foreseeable future.5 Microsoft proposed a remedy where it would be obligated to offer certain games on specified platforms over a 10-year period.6 As part of its effort to secure regulatory approval, Microsoft entered into agreements with Nintendo and three cloud gaming providers, Nvidia, Boosteroid, and Ubitus, to allow Activision games on their platforms for at least 10 years post-merger, and to produce Call of Duty on Nintendo platforms for at least 10 years post-merger. The CMA rejected the offer, holding it did not extend to enough cloud gaming services, it was not open to other PC operating services, and was too standardized to embrace the creativity of market competition in the gaming industry. The CMA also noted that Microsoft’s agreements with the cloud gaming platforms only incentivized the other cloud gaming platforms to provide access to Activision games on their platform. While the agreements protected access to those three suppliers, the proposed remedies did nothing to ensure competition in the broader cloud gaming market.7 For the Nintendo agreement, the CMA held that demand for Call of Duty on Nintendo consoles was small enough that any agreement would not provide consumers any material benefit.8
The CMA also discussed how the remedy fell short in addressing its concerns over non-Windows gaming systems.9 While Windows committed to grant streaming rights for MacOS and other PC OS versions of eligible games, the CMA rejected the remedy.10 The CMA noted the remedy only covered games where Microsoft chooses to make alternative versions and would incentivize Activision to not make alternative OS versions of games. This would divert demand to Windows OS and impair the competitive viability of non-Windows gaming systems.11 While Microsoft said implementing a sufficient remedy would be impractical, the CMA held that Microsoft’s proposed remedy would too easily allow it to circumvent the purpose of the remedy and would be too burdensome to manage.12
Soon after the CMA’s decision, Activision decried it as a disservice to UK citizens, remarking that the UK is “closed for business” and that it will reassess growth plans for the country. Microsoft’s President Brad Smith echoed these statements, noting that the decision is “probably the darkest day in [Microsoft’s] four decades in Britain” and “discourages technology innovation and investment in the UK.” Microsoft argued that blocking the deal based on concerns over the impact on a “nascent technology” was disproportionate and “tantamount to lowering the evidentiary bar” to block a deal just because it is in a digital market.13
While it is expected that Microsoft and Activision will appeal, they face a herculean task—the specialist court applies a “judicial review” standard, assessing only whether the CMA acted illegally, irrationally, or improperly. A CMA merger block has never been fully overturned. While some parties have successfully secured a reevaluation of their case, they have faced the same outcome.
Complicating matters, the parties’ merger agreement expires on July 18, 2023, opening up the possibility for Activision to walk away with a $3 billion break fee. The EC’s deadline for a decision is May 22, 2023, and the FTC’s administrative trial is due to begin on August 2, 2023.
Impact on Cross-Border Deals
The Microsoft/Activision block is the latest in a pattern of regulators diverging in their treatment of mergers. While the CMA blocked the deal over concerns with cloud gaming, the FTC’s lawsuit involves concerns over cloud gaming, console gaming, and multigame libraries. At the same time, the EC is likely to clear the deal based on the same behavioral remedies the parties offered to the CMA. This highlights, yet again, the CMA’s deep skepticism towards such remedies, with the CMA comparing them to sector regulation, “replacing market forces in a growing and dynamic market with mandated regulatory obligations ultimately overseen, and enforced by, the CMA—in this case at a global level.”14 Parallel to the agency reviews, Microsoft had sought to address concerns related to cloud gaming by signing deals with players such as Nintendo, Boosteroid, Ubitus, and Nvidia—but even this proved futile in the face of CMA opposition.
Vertical mergers, in particular, have received divergent treatment. While the current FTC and the U.S. Department of Justice (DOJ) are skeptical of vertical mergers, merging parties have had success winning litigated cases in the U.S. The CMA, however, has taken a hardline stance against vertical mergers and behavioral remedies. For example, the CMA ordered the unwinding of Facebook/Giphy, even after multiple regulators, including the FTC, permitted the deal to proceed with no remedies. Cargotec/Konecranes was approved with remedies by the EC, but the CMA blocked it and the DOJ threatened a lawsuit. In ongoing investigations of Broadcom/VMware, the CMA is taking a broader view on theories of harm than the EC, which further complicates the review process.
For parties to a cross-merger deal, this decision is a clear warning to develop a comprehensive plan to address potentially divergent regulatory concerns across the globe. Many of the global review standards seem similar, with the United States’ “substantially to lessen competition” standard,15 the EC’s “significant impediment to effective competition,”16 and the CMA’s “substantial lessening of competition”17 all guiding agency review.
However, even if the agencies ultimately align, as the FTC and CMA deal did with Microsoft/Activision, multiagency review can slow down review, increase costs, and complicate strategy. Although parties may structure their deals to allow for time to litigate against the FTC or the DOJ, a CMA block can mean game over. With the CMA likely to receive even broader review powers based on draft legislation (including a new share of supply test that removes the requirement for a horizontal overlap), this “voluntary” regime should be front and center in any global M&A game plan.
[1] UK CMA Press Release, “Microsoft / Activision deal prevented to protect innovation and choice in cloud gaming” (Apr. 26, 2023); UK CMA Final Report, Anticipated acquisition by Microsoft of Activision Blizzard, Inc. (Apr. 26, 2023) at page 415.
[2] Id. at 191-92.
[3] Id. at 218-247.
[4] Id. at 364-65.
[5] Id. at 247-259.
[6] Id. at 335.
[7] Id. at 283.
[8] Id. at 403-04.
[9] Id. at 364-66.
[10] Id.
[11] Id.
[12] Id. at 365-66.
[13] Id. at 405.
[14] UK CMA Press Release, “Microsoft / Activision deal prevented to protect innovation and choice in cloud gaming” (Apr. 26, 2023).
[15] 15 U.S.C. § 18.
[16] Council Regulation (EC) No 139/2004 of January 20, 2004, on the control of concentrations between undertakings.
[17] UK CMA Merger Assessment Guidelines (OFT1254/CC2).
