Enter the UK Competition & Markets Authority. The agency concluded earlier this month that the combination poses a “realistic” threat to competition, setting the stage for a deeper investigation. If that next probe – which was confirmed Thursday – crosses the higher threshold of proving damage is “probable,” the likelihood of the transaction dying increases significantly.
The UK approach to antitrust law has evolved since Brexit, leading to some notable departures from Europe. The UK in particular has expressed its reluctance to approve potentially anti-competitive deals simply because an acquirer promises to be good – the so-called conduct measure.
This attitude does not necessarily mean that the UK is more likely to block mergers. Like the US Federal Trade Commission, it allowed Meta Platforms Inc. to purchase software company Kustomer without appeal, while Europe only granted approval after the Facebook owner agreed to a long-term restraint on its conduct. But it shows the importance of convincing the British watchdog that a deal is no problem at all.
At Activision, the CMA sees problems in three markets: gaming consoles, subscription services, and — most importantly — cloud gaming.
It understands Microsoft has incentives to push Activision titles like the blockbuster Call of Duty from rival Sony Group Corp.’s PlayStation console. to hold back. After all, a gamer’s choice of hardware is often determined by its suitability for just one title that may be played for hundreds of hours. According to the CMA, Microsoft is already taking such an approach with some future releases from Bethesda, the studio it bought last year.
Similar dynamics apply to game library subscriptions. If Activision titles could be rented exclusively through Microsoft’s Game Pass service, the tech giant could attract new members. These tactics could expand Microsoft’s audience, bring more gaming content to its platforms, and in turn attract more gamers — a virtuous circle for the US tech giant, a vicious circle for its competitors.
It’s no wonder that Sony’s market value fell $20 billion, or 13%, shortly after the deal was announced in January and has continued to fall ever since.
These concerns are not a regulatory bull’s eye. One hurdle is realizing that Microsoft has a commercial incentive to restrict Activision titles. The CMA says the lost licensing revenue as a result could be offset by the strategic advantage of drawing more people into Microsoft’s domain. But for high-grossing games, that benefit must be pretty big given the collapse in revenue from getting rid of third-party distribution.
Then there is the thorny issue of remedies. Microsoft has already made some general public promises (which Sony has reportedly criticized as short-lived). The key is whether these would be easy to monitor and remain relevant as technology evolved. Appropriate commitments could include not making Activision games exclusive (whether through purchase or subscription) and choosing its own products over those of Sony and competitor Nintendo Co., says Bloomberg Intelligence analyst Jennifer Rie.
Could a regulator reject these as unprofitable? It’s not as if gamers would remain silent when they saw a degradation in Activision content on PlayStation. This deal could be a test of skepticism about behavioral agents.
Cloud gaming is the gray area. This makes the business more open and competitive since players don’t need powerful (and expensive) consoles. The computing power for the software resides with the cloud service provider, the game is streamed to any internet-connected device with a browser or similar app for audio and video.
The fear is that buying Activision could “tip” this new market in Microsoft’s favor before competing services reach critical mass. The US giant could then potentially promote its own content to the detriment of smaller, independent game developers.
The CMA is rightly on the lookout for at-risk creatives. But blocking this transaction must be based on more than observing that Microsoft had an unmatched combination of content, existing users, and cloud infrastructure. Solid evidence is needed that this “ecosystem” would make it very difficult for tech competitors to attack Microsoft’s turf. If a deeper investigation turns it up, Microsoft is in trouble.
The UK is commendably undeterred by market uncertainty. However, care must be taken. The merging parties can object to a veto of a deal at any time. A reversal after the blocking of a major technology transaction would damage the UK’s credibility in antitrust matters.
More from the Bloomberg Opinion:
• A Beltway Radical gears up to take on Big Tech: Parmy Olson
• Bored as an M&A banker? Become a Literary Agent: Chris Hughes
• Microsoft’s roller coaster ride exposes cloud risks: Conor Sen
(Adds a confirmation of the second phase investigation. An earlier version of this corrected spelling by Jennifer Rie in the 11th paragraph.)
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
For more stories like this, visit bloomberg.com/opinion