Microsoft’s merger with Activision Blizzard is a source of concern for UK regulator

The U.K.’s competition regulator, the Competition and Markets Authority, has decided that Microsoft’s $70 billion acquisition of Activision Blizzard may harm competition in the video games market, and that it merits deeper investigation.

The CMA concluded its Phase 1 investigation and expressed concern that this deal would harm competition in all markets, including the one for consoles. However, it also raised concerns about the future of cloud gaming subscription services, which Microsoft is a pioneer in. The CMA will move to a more penetrating Phase 2 investigation, unless Microsoft and Activision Blizzard provide an undertaking, within the next week, proving that there’s no risk to competition in the UK.

The CMA highlighted “a realistic prospect of a substantial lessening of competition […] in gaming consoles, multi-game subscription services, and cloud gaming services.”

It examined the possible impact on the competition between Microsoft and Nintendo in terms of console markets. It highlighted the risk to Sony in particular of Microsoft owning “some of the world’s best-selling and most recognisable franchises, including Call of Duty, World of WarcraftAnd Candy Crush.”

But the CMA also noted that the gaming industry is in a “transitional phase” with the advent of cloud gaming, and subscription services like Xbox Game Pass. These, it believes, offer a “window of opportunity for new entrants” that doesn’t exist in the console space. It stresses the strength of the “gaming ecosystem” Microsoft already has: consoles, a subscription service, a cloud gaming service, its own cloud platform (Azure) and a ubiquitous PC operating system (Windows), as well as 24 game development studios.

The CMA’s concern is as much about what leveraging the huge Activision Blizzard catalog of popular game franchises against this ecosystem will do to the future of the gaming landscape, as what it might mean for Sony to be denied new Call of Duty games. About Game Pass, it said, “as the multi-game subscription market is still in its infancy, the effect of the Merger could be to tip or significantly increase concentration in the market in Microsoft’s favour before future rivals have a chance to develop.” For the longer-term future of cloud gaming, the impact of the deal was potentially even more stark, the CMA said. “The CMA is concerned that, by leveraging ABK’s content and Microsoft’s wider ecosystem, Microsoft will have an unparalleled advantage over current and potential cloud gaming service providers.”

In calm and non-combative statements, Microsoft and Activision suggested that the CMA’s decision was expected, reasonable, and just another step in a long process. Activision CEO Bobby Kotick said, “As our industry continues to see numerous companies investing aggressively in gaming, including many of the world’s largest technology and media companies, government regulators are taking appropriate and deliberate steps to better understand our industry and the growing competition from around the world.”

Microsoft Gaming boss Phil Spencer argued that bringing games like Call of Duty, Overwatch, and Diablo to Game Pass, and by opening up “new distribution opportunities […] outside of mobile app stores” on mobile via the cloud, Microsoft was increasing choice for both players and game developers. He also restated Microsoft’s “principled” commitment to keep Call of Duty on PlayStation, noting that Microsoft supported multi-format publishing for MinecraftMojang was acquired.

What’s interesting about the CMA’s position is that it views console, cloud, and subscription platforms as quite distinct. While Microsoft has been quick to reassure that it won’t make Call of Duty console-exclusive to Xbox, it has made no such undertaking about allowing any of Activision Blizzard’s games onto other subscription services. At least in the UK, Game Pass exclusiveness and cloud exclusivity is as crucial, if no less, than for regulators. Microsoft is still obligated to provide answers.