Microsoft, Activision-Blizzard, and the CMA: So, What’s Next?

In a surprise decision yesterday, the UK’s Competition and Markets Authority made the decision to block Microsoft’s planned $69 billion acquisition of Activision-Blizzard, citing concerns over Microsoft’s ability to dominate the emerging cloud gaming market with exclusives like Call of Duty.

While the deal has seen challenges in numerous other regions including the US and the EU, many expected the CMA to approve it, especially after its March statement that Call of Duty console exclusivity was no longer a concern. Thus with further legal challenges looming globally and Microsoft set to appeal the CMA’s decision, many are now wondering what’s next for Microsoft and Activision-Blizzard both in the UK and abroad.

The answer is of course complicated, dependent on multiple regulatory bodies, time consuming, and above all, expensive. We spoke to lawyers and analysts to help unpack the rocky road Microsoft has ahead of it if it wants to pursue Activision-Blizzard, what possible outcomes remain, and why we’re likely going to be hearing about this deal for months and potentially years to come.

What Happened and Why?

After a lengthy review, the CMA has moved to prevent Microsoft from acquiring Activision-Blizzard, but not for the reason many expected. While much of the public debate has centered around the possibility of Call of Duty console exclusivity to Xbox, the CMA determined back in February that this was not actually a serious concern. In the end, what convinced the CMA to fire back was not Call of Duty, but cloud gaming.

We’ve covered what exactly the CMA’s objections are to the acquisition regarding cloud gaming in detail elsewhere, but to summarize, the CMA is concerned that if Xbox purchased Activision Blizzard, it would be able to dominate the cloud gaming market by making games like Call of Duty and World of Warcraft not console-exclusive, but exclusive to its own cloud gaming platforms. With these content powerhouses in its pocket, the CMA says, Microsoft could effectively control elements of the market such as subscription pricing and structure without significant opposition from other services that were missing these enormous games. It doesn’t help that the CMA already sees Microsoft as holding a dominant position in the emerging cloud gaming to begin with, thanks to its ownership of Windows OS, significant cloud infrastructure, and its already-robust content library.

If all this sounds like a pretty big deal, that’s because it is: for Microsoft to successfully follow through on its plans to pay $69 billion for Activision Blizzard, it needs approval from regulators in various regions including the UK, the US, and the EU. While some countries have already signed off, both the US and EU’s decisions are still pending, meaning the UK’s rejection could be just one of more to come. And while Microsoft claims it will appeal, the longer this goes on, the more expensive and obnoxious it gets for the company to follow through.

What Comes Next?

As Alex Haffner, competition partner at London law firm Fladgate, explained to me, Microsoft effectively has four weeks to submit an appeal document with the UK’s Competition Appeal Tribunal (CAT), which will then go onto judge whether or not the CMA “has acted within the boundaries of its proper discretion in reaching its final decision.”

“Generally this is a high bar for appellants to overcome and successful appeals of decisions by the CMA to block mergers have been rare, albeit not unprecedented,” Haffner explained. “Overall one can expect the appeal process to last three to four months in total. If the CAT does uphold any appeal, the most likely outcome would be a remittal of the case back to the CMA to re-make its decision based on any criticisms upheld by the CAT.”

There are certainly criticisms to be made of the CMA’s final ruling. Gamma Law’s David B. Hoppe pointed out that the CMA’s definition of “cloud gaming” as its own market segment is a difficult argument to make, adding that the CMA “sort of cherry-picked some things to support the position that Microsoft is already a dominant player in cloud gaming.”

As Haffner mentioned, it’s not common for CMA decisions to be overturned. From 2010 to 2020, the CMA won 67% of merger appeals, and even if Microsoft does manage to get the CAT on its side, that doesn’t mean the merger is a done deal. For one, the CAT isn’t examining whether or not the CMA’s arguments were sound or not: it’s there to make sure the CMA didn’t do anything irrational or illegal, and that it followed procedure. So the CAT could find the CMA acted inappropriately, but not in a severe enough way to merit another crack at the examination, and the merger would still be prohibited. Or, it could kick the decision back to the CMA to reexamine it correctly, likely with the same group of investigators, in a process that could take several more months.

While some analysts have suggested Microsoft could offer further concessions to appease the CMA, Haffner pointed out to me that this is not a likely route at this stage, hence the appeal. As part of the CMA process, Microsoft already offered remedies (such as its pledge to offer its games on Nvidia GeForce Now for the next ten years), but the CMA has already ruled that these were insufficient – largely because they would ultimately require proactive CMA enforcement down the line to ensure Microsoft did not become dominant. So while Nvidia and other cloud gaming companies that have benefited from these promises are rallying in Microsoft’s favor, it may not mean anything in the end.

What About the FTC?

Unlikely as it’s looking for Microsoft, let’s say it manages to win over both the CAT and the CMA. Even then, it’s still facing challenges in the EU and the US, which we should expect to hear more about in May and August, respectively. Haffner noted that the CMA’s decision has “set an important precedent” for both the EU Commission and the US Federal Trade Commission as their deliberations continue.

Sam Castree of Sam Castree Law explained that while the UK ruling doesn’t practically impact the US’s own, separate decision, it might nudge the US in a slightly different direction. Up to this stage, the FTC’s arguments have focused on two areas: concerns about Microsoft withholding games from other platforms, and concerns that Microsoft will create a monopoly in a narrow definition of a “relevant market” – such as “high performance consoles” or, yes, “cloud gaming.” After seeing the CMA drop its concerns about Call of Duty exclusivity and focus on cloud gaming, the FTC might be motivated to change its tactics to line up with the CMA.

It would put the FTC in an awkward place to argue that the CMA was correct about harm to cloud gaming, and wrong about harm to consoles.

“The FTC might drop some of the contentions in the initial complaint and focus on a narrower set of concerns, like the cloud gaming market,” Castree said. “They could easily adopt some or all of the CMA’s findings to bolster their own arguments, and tailor the fight to areas that they feel are the strongest. The other possibility is that they adopt the CMA’s findings on cloud gaming but still maintain the entirety of the initial complaint anyway.”

However, Castree noted that this second possibility seems unlikely, given that the only major competitor claiming harm to the console market at this stage is Sony. “Plus, it would put the FTC in an awkward place to argue that the CMA was correct and wise and good about harm to cloud gaming, and wrong and foolish and bad about harm to consoles,” he added.

All of this leaves Microsoft with a rather expensive decision on its hands. Legal fees for all of these battles will quickly add up, but even if Microsoft were to back out now, there would be serious financial consequences. As a part of the merger agreement, Microsoft agreed to pay out a whopping $3 billion to Activision Blizzard if the deal fell apart after April 18, 2023. At some point, the tech giant will have to decide if it’s worth pumping infinite money into lawyers in multiple countries over months or even years of this, or if it should swallow its pride and $3 billion to escape a prolonged legal battle.

With all this combined, it’s starting to look like Microsoft’s chances of closing the most expensive deal in gaming are growing slimmer. For all Microsoft’s confidence in the lead-up and all Sony’s bluster around Call of Duty, it’s a bit surprising to see cloud gaming of all things take the wind out of this deal’s sails. Still, the fight’s not over just yet – perhaps Microsoft, Activision Blizzard, or cloud gaming will surprise us again.

Rebekah Valentine is a news reporter for IGN. You can find her on Twitter @duckvalentine.