GAME OVER? CMA blocks Microsoft’s acquisition of Activision
As previously reported, the CMA had initially considered that the transaction would give rise to competition concerns in both the console and cloud gaming markets. However, on 24 March the CMA subsequently took the unusual step of amending its provisional findings to drop concerns in relation to console gaming, focusing only on cloud gaming services. In its final decision of 26 April, the CMA finally opted to block the deal on the basis of those concerns in the nascent market for cloud gaming.
Microsoft tried to address the CMA’s concerns by offering a commitment to license Activision games for certain competing cloud gaming platforms for ten years. However, the CMA rejected Microsoft’s proposal on the basis that it would have been difficult to monitor, did not provide for all potential business models and future competitors and had a high circumvention risk. The CMA was concerned that these issues would be exacerbated by the dynamic and nascent nature of the cloud gaming market.
The CMA is becoming an increasingly interventionist enforcer in global M&A, in particular in the tech industry. This latest decision has resulted in vocal criticism not only from Microsoft and Activision, but also from the broader digital community. Many have noted that, while Rishi Sunak is aggressively promoting a tech friendly “Unicorn Kingdom”, the CMA’s approach to technology companies is more hostile. Indeed, the CMA is fighting a significant number of technology cases at the moment, including a high-profile fight with Apple through its App Store market investigation, and its announcement of 3 May 2023 of a study into the impact of generative AI on competition.
The CMA focused on the implications of combining Activision’s portfolio of gaming content (such as Call of Duty, Overwatch, and World of Warcraft) with Microsoft’s pre-existing position in cloud gaming services resulting from its ownership of a leading gaming platform (Xbox and a large portfolio of games), PC operating system (Windows), and global cloud computing infrastructure (Azure and Xbox Cloud Gaming).
Specifically, the CMA believed that Microsoft’s position in cloud gaming services would provide the incentive to make Activision’s games exclusive to its own cloud gaming service. The CMA concluded that even a moderate increment to Microsoft’s “already strong” position could be expected to substantially reduce competition in the developing market, to the detriment of current and future cloud gaming users.
It bears emphasis that cloud gaming is a nascent category and the CMA’s concern was predicated on an expectation that cloud gaming providers would need to offer a strong gaming catalogue in the future. Nevertheless, Microsoft proposed a behavioural remedy to address the concern. This comprised an obligation to license a defined set of Activision games to cloud gaming services through certain rival storefronts for ten years.
However, the CMA found this proposal to be insufficient as:
- it did not sufficiently cover different cloud gaming service business models, including multigame subscription services;
- it was not sufficiently open to providers who might wish to offer versions of games on PC operating systems other than Windows;
- it would standardise the terms and conditions on which games are available, which would otherwise be determined by dynamic competition; and
- it would be very difficult to monitor and gave rise to a high risk of circumvention by Microsoft.
The nature of these issues was somewhat predictable, as the CMA’s provisional findings had already focused on divestiture as the only viable solution. That said, after the CMA narrowed the scope of its probe to cloud gaming, many had thought the CMA might unusually allow the transaction to proceed on the basis of a behavioural remedy.
However, the CMA ultimately decided that the only solution was to prohibit the merger. This block comes a month before the EU Commission is set to conclude its own investigation during which Microsoft is understood to have offered a similar set of commitments.
Many had predicted the CMA would resolve this case with a compromise behavioural remedy, after having reversed its position as regards console gaming. The decision therefore underlines two aspects of the CMA’s approach to merger control review: first, its willingness to block deals based on concerns around the future development of the market in question; and second, the CMA’s strict approach to behavioural commitments, which is notable at a time when the European Commission is showing a more flexible approach to remedy design.
It will, therefore, be interesting to see whether the Commission adopts a more permissive approach here (as also happened in the 2022 Cargotec/Konecranes merger which was approved in Brussels but blocked in London). Meanwhile, Microsoft has stated that it will appeal the decision and remains committed to the acquisition. However, appeals of CMA merger control decisions are decided on a Judicial Review standard, and not on the basis of a full merits review. Provided the CMA can demonstrate that it exercised its discretion in a rational manner (and within the limits set out by the Enterprise Act) it will be difficult for Microsoft to overturn the prohibition. Indeed, even “successful” appeals of CMA merger control decisions (which have been rare in recent years) have often been pyrrhic victories that were insufficient to ultimately overcome the CMA’s prohibition.
This article was authored by Richard Pepper, a partner in our competition practice, Andrew Morrison, a senior associate in our competition practice, and Roque Botas Armero, a stagiaire in our competition practice.