Microsoft’s Activision Blizzard acquisition blocked by UK regulators

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Microsoft’s $68.7 billion deal to acquire Activision Blizzard has been blocked by the UK’s Competition and Markets Authority (CMA). After months of analyzing 3 million Microsoft and Activision documents and more than 2,100 emails from the public, the CMA has concluded that the deal could “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.”

Microsoft says it will appeal the decision, but it’s a blow to Microsoft’s hopes of acquiring Activision Blizzard and will likely prevent the company closing its giant deal if an appeal is unsuccessful.

“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,” says the CMA.

The CMA estimates that Microsoft controls around 60 to 70 percent of global cloud gaming services and that adding control over Call of Duty, Overwatch, and World of Warcraft would give Microsoft a significant advantage in the cloud gaming market.

Microsoft tried to address the cloud gaming concerns that led to this decision. The software giant has secured cloud gaming deals with Boosteroid, Ubitus and Nvidia, allowing Xbox PC games to run on these competing cloud gaming services. In December we signed a similar deal with Nintendo. The 10-year contracts also include access to Activision's Call of Duty games and other Blizzard games, subject to regulatory approval.

The CMA says it has examined these deals, but that they contain “a number of significant shortcomings” in cloud gaming services. The CMA says the deals are “too limited in scope” with models that meant gamers had to acquire the right to play games “by purchasing them on certain stores or subscribing to certain services.” The deals didn’t include agreements for Microsoft providing access to these games in rival multi-game subscription services or the ability for rivals “to offer versions of games on PC operating systems other than Windows.”

The CMA also noted that the deals would “standardize the terms and conditions on which games are available,” instead of open competition in the cloud gaming market. “We concluded that, without the merger, Activision games would become available on cloud gaming services in the UK in the near future.”

The CMA initially sided with Microsoft over Call of Duty on PlayStation concerns last month, noting that it would be costly for Microsoft to withhold the popular franchise from PlayStation. That left some cloud gaming concerns on the table, but the regulator says it considered whether the benefit of having Activision’s content on Game Pass outweighed the concerns around cloud gaming in the UK.

“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,” says Martin Coleman, chair of the independent panel of experts conducting the investigation.

“We remain fully committed to this acquisition and will appeal,” says Microsoft president Brad Smith in a statement to The Verge. “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.”

We remain fully committed to our acquisition with @ATVI_AB and will appeal today's determination by the CMA. Here's our statement. pic.twitter.com/ylvDP5RUqQ

— Brad Smith (@BradSmi) April 26, 2023

Activision Blizzard CEO Bobby Kotick says the company has already started work on an appeal in an email to employees on Wednesday. “Alongside Microsoft, we can and will contest this decision, and we’ve already begun the work to appeal to the UK Competition Appeals Tribunal,” says Kotick. “We’re confident in our case because the facts are on our side: this deal is good for competition.”

In a media statement, Activision took a harsher tone toward the UK. “The CMA’s report contradicts the ambitions of the UK to become an attractive country to build technology businesses,” said spokesperson Joe Christinat. “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.”

Microsoft's appeal rejects the company's plans to try to close the deal by the end of July. Microsoft originally planned to close the deal by July 18, but is now forced to negotiate an extension to the merger agreement. If Microsoft's appeal to the CMA is rejected or other regulatory approval is not granted, the company will have to pay $3 billion in damages to Activision.

Regulators in Saudi Arabia, Brazil, Chile, Serbia, Japan and South Africa have approved the deal. The European Union is expected to make a decision by May 22, and Reuters reported last month that EU regulators could approve the deal following licensing agreements between Nvidia and Nintendo.

Microsoft also faces regulatory scrutiny from the US Federal Trade Commission (FTC). The FTC filed a lawsuit last year to block Microsoft's purchase of Activision Blizzard, and investigations are ongoing. An evidence hearing is scheduled for August 2 and there are indications that the documents will reveal rare details about the gaming industry's exclusive deal once they are released.