Microsoft and Activision merger blocked over UK’s cloud gaming concerns

Microsoft and Activision Blizzard are attempting to close the $68.7 Billion merger of both companies. They have invested a lot of time in placating the regulators regarding the Call of Duty. If approved, the deal would bring one of gaming’s biggest franchises under the already thriving Xbox ecosystem. Regulators and rival platform holders — namely, Sony, which has aggressively lobbied global governments in an effort to shut down the acquisition — have fretted about the potential for console exclusivity that would stifle competition. In late March, U.K. regulatory authorities seemed to have set aside any concerns about possible Call of Duty exclusivity. This was a major factor in the decision.

Onlookers were surprised when, on April 26th, UK antitrust regulator Competition and Markets Authority moved to block this deal, citing its potential impact on cloud gaming. The CMA’s worries about cloud gaming aren’t new. They were outlined in the regulator’s provisional findings from earlier this summer, but public attention remained on Microsoft possibly making Call of Duty exclusively for Xbox. Although cloud gaming is a young industry, its influence extends beyond the games that you can play on your smartphone via Game Pass. Cloud gaming is a broad term that encompasses how data are stored, shared, and accessed.

Cloud gaming is considered a nascent market in a formative period that’s defining how the new technology will be adopted by players. Companies have been toying with cloud gaming for more than 20 years, but the technology hasn’t advanced enough to bring it to a wider audience — until recently, that is. Cloud gaming is marketed by U.K. authorities as an affordable way for gamers to play video games. It allows them to use devices they already own, such as laptops or phones, without having to purchase expensive high-end equipment. Beyond what U.K. officials believe, technology has advanced to the point that it is possible for people with smartphones or laptops to play high-end video games. You can also read about how to get started.Have that potential.

Nvidia’s GeForce Now service, which debuted in a limited capacity in North America in 2014, is one of the early forces in cloud gaming. Microsoft, Google and Amazon have all launched their own cloud-streaming initiatives. With Google Stadia’s attempt to corner the market having failed, and Amazon’s Luna platform still niche, Microsoft has dominated the market, using cloud gaming as a small but significant feature of its Game Pass subscription service, which gives customers access to hundreds of games for a monthly fee. There are many of these titles that can be played online. Amazon’s Amazon Web Services has an enormous stake in the cloud service market. U.K. regulators estimate that Microsoft has a 60-70% hold on the global cloud gaming market, and said the company “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).”

The Activision Blizzard merger would give Microsoft more control over the market and over how its popular games are played — the likes of Call of Duty, Overwatch, and World of Warcraft, the CMA said — and potentially allow the company to exercise exclusivity rights over streaming platforms.

Microsoft is able to leverage the power of its Azure infrastructure to support Xbox Cloud Gaming; Bloomberg reported in December that Microsoft owns “more than 200 data centers” specific to Azure, “which support the lower-latency cloud gaming services for its stable of titles on Game Pass.” Sony, which has had its market position scrutinized by regulators, is well behind Microsoft in how it supports its own subscription service, PlayStation Plus. While PlayStation Plus gives subscribers access to cloud gaming, its offerings are paltry in comparison to Game Pass’ streaming options.

“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,” the CMA wrote. “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.”

Microsoft attempted to address these concerns by signing a deal with Nvidia to bring Microsoft’s PC games to GeForce Now. The company also signed deals with other cloud gaming services, such as Boosteroid. Ubitus.) Activision Blizzard’s games will be included as well, should the merger go through. Nvidia previously voiced concern regarding the merger citing its potential to hinder competition. The 10-year deal between Microsoft and Nvidia appears to quell that concern, at least for Nvidia — but perhaps not U.K. regulators — as Activision Blizzard games would seemingly remain available on GeForce Now. Microsoft cited this agreement in its response to the CMA’s provisional findings in March, calling the concerns “misplaced.”

Joost Rietveld, associate professor of strategy and entrepreneurship at the University College London School of Management, filed a public comment after the CMA’s adjusted findings in March in which he attempted to define cloud gaming — specifically, whether it’s a “distinct market.” Rietveld argued that cloud streaming has four different services: “as a feature,” “as a platform,” “as a complement,” and “as an input.” Each is a “different scope,” he said, and all categories “arguably do not compete.” (Some may compete, like cloud gaming’s potential uses “as a feature” and “as a platform.” Sony and Microsoft, with PlayStation Plus and Game Pass, respectively, do compete in the “as a feature” category, going by Rietveld’s descriptions.) Rietveld concluded that cloud gaming can’t be collapsed into a single market definition, and the CMA should not view it as such. The CMA seems to have disagreed.

Microsoft and Activision Blizzard announced their intention to appeal immediately after the CMA’s decision. Microsoft president Brad Smith accused the CMA of having a “flawed understanding of this market and the way the relevant cloud technology actually works.” An Activision Blizzard spokesperson added: “The report’s conclusions are a disservice to U.K. citizens, who face increasingly dire economic prospects. We’ll reassess the growth plan for U.K. Global innovators large and small will take note that — despite all its rhetoric — the U.K. is clearly closed for business.”

Microsoft and Activision have yet to receive a final decision by the U.S. Federal Trade Commission. The FTC sued the company in an attempt to stop the deal. The FTC, like the CMA, is concerned about Microsoft’s established dominance in the cloud gaming sector and about how the Activision Blizzard acquisition, with its massive library of popular games, would impact the market. In March, the FTC issued a motion looking for documents related to Microsoft’s cloud gaming business.