Microsoft Deal is a tough target for Trustbusters
Enter the UK Competition and Markets Authority. The agency concluded earlier this month that the suit posed a “realistic” threat to competition, paving the way for further investigation. If this next investigation – confirmed on Thursday – crosses the upper threshold of demonstrating that the harm is “likely”, the risk that the transaction will die increases considerably.
The British approach to antitrust has evolved since Brexit, generating notable differences with Europe. In particular, the UK has signaled its aversion to approving potentially anti-competitive deals just because an acquirer promises to be good – the so-called behavioral cure.
This position does not necessarily mean that the UK is more likely to block mergers. Like the US Federal Trade Commission, it cleared Meta Platforms Inc. to buy software company Kustomer without recourse, while Europe only granted approval after the Facebook owner agreed to constraints long-term on his conduct. But it shows the value of convincing the British watchdog that a deal isn’t a problem in the first place.
With Activision, the CMA sees problems in three markets: game consoles, subscription services and, most importantly, cloud gaming.
He believes Microsoft has incentives to withhold Activision titles like PlayStation blockbuster Call of Duty from rival Sony Group Corp. After all, a gamer’s choice of hardware is often determined by its suitability for a single title that can be played for hundreds of hours. The CMA says Microsoft is already taking such an approach with some future releases from Bethesda, the studio it bought last year.
A similar dynamic applies to game library subscriptions. If Activision titles were available to rent exclusively on Microsoft’s Game Pass service, the tech giant could attract new members. These tactics could expand Microsoft’s audience, bringing more gaming content to its platforms, in turn attracting more gamers – a virtuous cycle for the US tech giant, a vicious cycle for its competitors.
No wonder Sony’s market value plummeted $20 billion, or 13%, just after the January deal was announced and has fallen further ever since.
These concerns are not directly related to regulation. One hurdle is establishing that Microsoft has a commercial incentive to restrict Activision titles. The CMA says the licensing revenue lost by doing this “could” be offset by the strategic benefit of bringing more people into Microsoft’s business. But with big-selling games, that benefit must be quite substantial given the hit to revenue from the removal of third-party distribution.
Then comes the thorny question of remedies. Microsoft has already made consumer commitments (which Sony has reportedly criticized for being short-lived). The key is whether these would be easy to monitor and remain relevant as technology evolves. Appropriate commitments could include refraining from making Activision games exclusive (whether by purchase or subscription) and favoring its own products over those of Sony and rival Nintendo Co., says Jennifer Rie , analyst at Bloomberg Intelligence.
Could a regulator reject them as non-viable? It’s not like gamers are staying silent if they see any deterioration in Activision content on PlayStation. This agreement could be a test of skepticism towards behavioral remedies.
Cloud gaming is the gray area. This makes the business more open and competitive, as gamers don’t need powerful (and expensive) consoles. The processing power of the software belongs to the cloud service provider, the game is streamed to any internet-connected device with a browser or similar application for audio and video.
The fear is that buying Activision could “tip” this new market in Microsoft’s favor before competing services reach critical mass. The American giant could then be able to promote its own content to the detriment of small independent game developers.
The CMA is right to be wary of vulnerable creatives. But blocking this transaction must be based on more than the finding that Microsoft would have an unparalleled combination of content, existing users and cloud infrastructure. It needs strong evidence that this “ecosystem” would make it very difficult for tech rivals to attack Microsoft’s territory. If a deeper probe the product, Microsoft is in trouble.
It is commendable that the UK is not letting uncertainty about market developments weaken its resolve. However, he must be careful. The merging parties can always appeal any veto to an agreement. To reverse after blocking a major tech deal would damage the UK’s antitrust credibility.
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(Adds second-stage investigation confirmation. An earlier version of this corrected spelling by Jennifer Rie in the 11th paragraph.)
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering the deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
More stories like this are available at bloomberg.com/opinion