Microsoft’s Proposed Acquisition of Game Giant Activision

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About the deal

In January 2022, Microsoft announced plans to acquire Activision for $68.7 billion: potentially one of the largest mergers in gaming history. Activision is the leading global developer, distributor, and publisher of interactive entertainment and blockbuster games. Its extensive roster includes Call of Duty, Guitar Hero, Tony Hawk’s, World of Warcraft, and Candy Crush Saga.

Microsoft’s proposition led to the UK’s Competition Markets Authority (CMA), the Federal Trade Commission (FTC) in the US, and the European Commission all launching antitrust investigations citing concerns about stifling competition in the gaming industry. The CMA published an invitation to comment on the deal in July 2022, subsequently launching a thorough investigation in September.

Why has the deal been blocked?

In February of this year, CMA provisionally found that Microsoft’s proposed acquisition of Activision would likely restrict competition, specifically in relation to the nascent cloud gaming market. The US FTC also challenged the deal in December 2022, taking a broader stance. It argued that the acquisition would not only limit competition and/or generate monopolies for cloud gaming, but also for high-performance consoles (currently dominated by Sony’s market-leading PlayStation) and gaming subscription services.

The cloud gaming market

The CMA’s research concluded that cloud gaming could potentially transform the industry, replacing gaming consoles entirely. Furthermore, it forecasted that the cloud gaming market could be worth an estimated 11 billion pounds ($13.7 billion) globally by 2026.

CMA Panel Chair, Martin Coleman stated, “Cloud gaming is growing fast with the potential to change gaming…freeing people from the need to rely on expensive consoles and gaming PCs and giving them more choice over how and where they play games […] This means that it is vital that we protect competition in this emerging and exciting market.”

The CMA claimed that Microsoft already held approximately 60%-70% of worldwide cloud gaming services, compounded further by its ownership of Xbox, Azure and Windows. If it successfully acquires Activision, Microsoft could make games like Call of Duty exclusive to its own cloud gaming services, prompting both major financial and business gains.

Attempting to overcome such concerns, Microsoft contested that it would seek out licensing deals with other streaming platforms, such as Boosteroid and Valve Corp. Furthermore, Microsoft highlighted that it had already offered Sony a 10-year licence for a multi-billion-dollar franchise, Call of Duty, in keeping with their agreement to bring the game to Nintendo’s Switch.

What’s next?

Microsoft can appeal to the UK’s Competition Appeal Tribunal (CAT) which will examine the CMA’s decision. As Edward Lane, Senior Associate at Harbottle & Lewis, states, “The CAT aims to deal with ‘straightforward’ cases in under nine months – and Microsoft/Activision is anything but straightforward.”

If Microsoft wins, the case will be returned to regulators for further review, upon which Microsoft is able to offer new modifications to the deal. However, as James Groves, a Competition Associate at Fieldfisher, states, “The likelihood is that without a material change in circumstances or new evidence, the CMA is most likely to reach the same conclusion as it did the first time around.”

All European regulators will rule on the deal by the 22nd of May. If they also choose to block the deal, Microsoft will face an increasingly difficult battle and may decide to cut ties: paying Activision a massive $3 billion break fee.

Microsoft has said it will appeal the CMA’s decision to block its merger with Activision, having recently hired an “EU-beating” lawyer, and must do so by the 24th of May.