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UK blocks Microsoft Activision Blizzard deal

$68.7bn acquisition fails over cloud gaming concerns, Microsoft to appeal.

Microsoft's $68.7bn Activision Blizzard deal has been dramatically blocked by UK regulators, following a months-long investigation.

The decision by the UK's Competition and Markets Authority prevents Microsoft from buying the publisher behind Call of Duty, World of Warcraft and Candy Crush, follows earlier concerns it would lead to an unfair impact on archrival PlayStation.

Instead, today's decision stems from the CMA's concerns over the deal's proposed impact on the cloud gaming sector. In today's final report, the CMA said Microsoft's ownership of Activision Blizzard risked "stifling competition in this growing market". In response, Microsoft has said it will now appeal.

Newscast: Can Microsoft's Activision Blizzard deal appeal succeed?Watch on YouTube

"We remain fully committed to this acquisition and will appeal," Microsoft president Brad Smith said today. "The CMA's decision rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom.

"We have already signed contracts to make Activision Blizzard's popular games available on 150m more devices, and we remain committed to reinforcing these agreements through regulatory remedies. We’re especially disappointed that after lengthy deliberations, this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works."

Activision Blizzard issued its own response, criticising the decision as a "disservice to UK citizens, who face increasingly dire economic prospects. Here's that statement in full:

"The CMA's report contradicts the ambitions of the UK to become an attractive country to build technology businesses," an Activision Blizzard spokesperson said. "We will work aggressively with Microsoft to reverse this on appeal. The report's conclusions are a disservice to UK citizens, who face increasingly dire economic prospects. We will reassess our growth plans for the UK. Global innovators large and small will take note that - despite all its rhetoric - the UK is clearly closed for business."

Approval - or not - by the CMA had been widely seen as the deal's biggest test, especially after the UK regulator initially issued a stern warning that the deal "could harm UK gamers" and potentially result in "higher prices, fewer choices, or less innovation".

Cloud concerns prevent deal

So what went wrong? Today's report makes clear the CMA still harbours deep concerns over Microsoft's already entrenched position in cloud gaming, and that the company would "find it commercially beneficial to make Activision's games exclusive to its own cloud gaming service".

The CMA stated that Microsoft's current large share of the global cloud gaming market was already benefiting from its ownership of Xbox, Windows and cloud infrastructure Azure, and that being able to control franchises such as Call of Duty, Overwatch, and World of Warcraft would risk any further competition in this space.

"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," the CMA wrote.

Microsoft submitted a proposal to address the CMA's concerns, the regulator notes, though its remedies did not go far enough. A major sticking point was that the CMA decided Microsoft's much-touted 10-year deals with other cloud gaming companies were "behavioural" remedies that could contain loopholes and would require ongoing enforcement.

Ultimately, it decided that simply blocking the deal was the safer option.

"There are significant risks of disagreement and conflict between Microsoft and cloud gaming service providers, particularly over a ten-year period in a rapidly changing market," the CMA wrote.

"Accepting Microsoft's remedy would inevitably require some degree of regulatory oversight by the CMA," the report continued. "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 CMA weighed up the benefit to gamers of having Activision Blizzard content easily accessible via Game Pass as a counterargument, but decided this did not outweigh its concerns.

"The CMA carefully considered whether the benefit of having Activision's content available on Game Pass outweighed the harm that the merger would cause to competition in cloud gaming in the UK," it said. "The CMA found that this new payment option, while beneficial to some customers, would not outweigh the overall harm to competition (and, ultimately, UK gamers) arising from this merger, particularly given the incentive for Microsoft to increase the cost of a Game Pass subscription post-merger to reflect the addition of Activision's valuable games."

Martin Coleman, chair of the independent panel of experts conducting the investigation, concluded by stating the CMA's decision was a win for the UK protecting competition in the "emerging and exciting" cloud gaming market.

"Microsoft already enjoys a powerful position and head start over other competitors in cloud gaming and this deal would strengthen that advantage giving it the ability to undermine new and innovative competitors," Coleman concluded. "Microsoft engaged constructively with us to try to address these issues and we are grateful for that, but their proposals were not effective to remedy our concerns and would have replaced competition with ineffective regulation in a new and dynamic market.

"Cloud gaming needs a free, competitive market to drive innovation and choice. That is best achieved by allowing the current competitive dynamics in cloud gaming to continue to do their job."

Global scrutiny continues

Today's decision comes as a huge shock, and follows recent suggestion by the CMA that it was softening its stance. A provisional conclusion document released last month pointed to today's positive outcome for Microsoft, with an acknowledgement the deal would "not result in a substantial lessening of competition in relation to console gaming in the UK".

Sony reacted angrily to that development, slamming the CMA's change of stance as "surprising, unprecedented, and irrational".

With the deal blocked - for now - here in the UK, Microsoft must also still pass two other key regulators before it can be finalised worldwide: the US Federal Trade Commission and the EU's European Commission.

As reported earlier today, Microsoft is already seeking a swift end to the FTC's concerns, working under the assumption the CMA would ultimately offer its approval. The EU, meanwhile, recently delayed its final decision on the deal until 22nd May, as Microsoft issued a flurry of announcements designed to appease any lingering anti-competition concerns around access to Call of Duty.

As recently as last month, the CMA was still deliberating whether Microsoft owning Activision Blizzard might make the company too competitive in cloud gaming.

If and when the deal is approved worldwide, Microsoft will have paid a record-breaking, eye-watering sum for one of the largest video game publishers on the planet. It will own Call of Duty from Activision, plus Blizzard franchises such as World of Warcraft, Diablo and Starcraft, as well as mobile giant King, maker of Candy Crush.

While much of the CMA's focus has been on Microsoft's ownership of Call of Duty, Microsoft itself has acknowledged the deal is crucial to its future plans on mobile.

Xbox lacks any major presence on phones, save for their use as streaming devices. But new rules are expected to kick in from March 2024 onwards, requiring Apple and Google to allow app stores from over companies - such as Microsoft itself. Here, the likes of Call of Duty Mobile, Diablo Immortal and Candy Crush Saga could sit - opening up Xbox's revenues to a still-largely untapped market.

Today's decision comes amidst a gloomier picture for Xbox overall, as sales of Series X/S consoles stall after a slow financial quarter.

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