CMA blocking Microsoft from acquiring Activision raises more questions than answers

UK’s Competition and Markets Authority (CMA) just announced  that it “prevented Microsoft’s proposed purchase of Activision over concerns 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.”

There is a lot to unpack here. Before I do, let me caveat that I’m not a legal nor a regulatory expert. But I can comment from the strategic, industry, as well as the consumer points of view.

To put it mildly, the more I think about and reread the announcement, the more questions I have.

The cited reasons

The key outstanding concern cited by the CMA is around Microsoft’s positioning in the nascent cloud gaming market.

I want to make sure not to misinterpret the CMA’s announcement, so I’m going to be quoting quite a bit here and offer my thoughts on each part.

How big is ‘too big’?

The press release starts by saying:

The UK cloud gaming market is growing fast. Monthly active users in the UK more than tripled from the start of 2021 to the end of 2022. It is forecast to be worth up to £11 billion globally and £1 billion in the UK by 2026. By way of comparison, sales of recorded music in the UK in 2021 amounted to £1.1billion.

Microsoft already accounts for an estimated 60-70% of global cloud gaming services and has other important strengths in cloud gaming from owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming).

Note that there is no mention of an estimate on what the CMA believes the cloud gaming market is worth today. Which begs the question - is it too small to call out in a press release? Or even too small to be put under so much scrutiny by the regulators?

If cloud gaming was to reach £1 billion in the UK in three years, while growth is really strong (having tripled in the last year, as CMA notes), it suggests we are still some distance away from this milestone in terms of the actual current number. While the absolute number (£11billion globally by 2026) looks ‘big’ in isolation, putting it the context of a $200+billion industry, cloud gaming will account for just around 5% of it. Not now, remember. In three years. So in the games industry terms – fairly small.

This raises a question – how big does a market need to be to fall under a regulator scrutiny? Indulge me for a second with a deliberately exaggerated analogy to drive this point home:

Imagine you bring about a new product. You put in a lot of money and effort to go to market with it. Simultaneously, there is a small handful of additional entities around the world introducing similar solutions into the market. But you had this vision for a long time and have invested enough money and time to solidify your positioning in the market early on – you even sacrificed some margin for the sake of early growth. Suddenly a regulator comes and says that your market share is too big for you to continue your efforts the way you originally envisaged.

Well… if you are one of the few early movers (and doing things right for the consumer) in a small market, your market share is naturally going to be high in relative (percentage) terms.

This is why the current size of the market is so important – if regulators are going to intervene in small nascent markets such as cloud gaming, they ultimately risk stifling innovation that requires significant investment to happen, in the first place.

As a result, Microsoft may naturally feel, that it is being punished for innovation which aims to make gaming better and more accessible to consumers (and to be clear, yes, make more money in the long-term). In a way it is becoming a victim of its own success. Hence, the comments by Activision that the ‘UK is clearly closed for business and innovation’.

The ‘cloud gaming concerns’ part of the press release then continues:

“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.”

This is a moot point, because at the end of the press release (tucked away in ‘points to editors no. 4’), the CMA acknowledges it did, upon review, find quite the opposite (i.e. that Microsoft would NOT have financial incentive to make CoD exclusive – as I said early on in the process). So it is a little unusual for that point to remain prominent in the statement,

The press release continues:

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 first sentence here is completely true, though there is no indication of how Microsoft would assert this potential control. Microsoft has extended offers and assurances to Nintendo as well as Sony for keeping CoD non-exclusive for at least ten years.

The second sentence (about Activision potentially starting its own cloud platform) may be true, but… CMA suggests that a part of this decision is to protect companies which may have cloud streaming plans on their own, including Activision. The paradox is that Activision had obviously agreed to the acquisition offer in the first place – in other words Activision decided that it would rather sell the company than pursue cloud gaming alone. If the games company with the most popular games franchise on earth made this decision, is the CMA expecting heaps of other smaller games companies to have a realistic stab at cloud gaming?!

The cloud cards have largely been dealt already

Though the CMA talks about potential control in the cloud gaming market, the reality is that the cards regarding cloud (incl. gaming) have largely been dealt already. Microsoft, Google and Amazon dominate the cloud space and while games companies may deploy their own cloud gaming services, in the majority of cases, they are likely to use cloud solutions by one of these three companies anyway.

Choice for the sake of choice, is not always better for consumers

The final sentence of the cloud concerns part of the press release reads:

“The cloud allows UK gamers to avoid buying expensive gaming consoles and PCs and gives them much more flexibility and choice as to how they play. Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities.”

Again, the first sentence is true. But the second one, about choice, is not necessarily better for the gamers. If every games publisher/developer ends up with their key titles under their own cloud gaming roof (because that will be the only meaningful way for smaller games companies to compete against the likes of Microsoft or Sony subscriptions), then the consumers are simply going to end up having to pay for all of these separate subscriptions. Ultimately, that approach promises to become a painstakingly fragmented and a more expensive experience for gamers. So yes, technically there will be more choice because there will be more services, but this is not good for gamers.

It also raises questions around whether a regulator can realistically protect both the markets and the consumer at the same time effectively. Given that there is inherent conflict between for-profit endeavours of companies vs. value exchange as perceived by consumers… but that would be a whole a separate post, so I’ll stop here.

A glimpse of hope?

After listing concessions that Microsoft had made already to make this work, the final part of CMA’s ‘remedy’ section in the press release says:Accepting Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA. By contrast, preventing the merger would effectively allow market forces to continue to operate and shape the development of cloud gaming without this regulatory intervention.

The first sentence offers a glimpse of hope for Microsoft. Though it will come at an additional cost. As Microsoft appeals, it will likely have to make additional concessions to get the deal approved. Microsoft has already made a number of concessions along the way and given the size and the importance of the deal, who is to suggest that it is not willing to give up a little bit more?

So, what comes next?

Ever since this story began, I’ve been vocal about not seeing any substantial reasons for the deal not to go through. Despite today’s announcement, I still don’t see any good reasons for the deal to be stopped. Having said that, I’m not the one who decides this.

Today’s announcement was a surprise to many, not least because it is difficult to  understand the substance behind the decision. For example, Steffan Powell, who covered this on for the BBC said on his Twitter how his Whatsapp is blowing up with industry insiders being surprised at this.

You can of course read this in two ways:

One – industry insiders have no idea what they are talking about.

Two – if so many insiders are so surprised, then perhaps there is a real disconnect between how the games industry is seen by the regulators versus those whose are on the ground.