Stormy weather delays Microsoft’s acquisition of Activision Blizzard
Global regulators out of sync on Microsoft's $69 billion purchase of video game giant.
Microsoft is edging closer to winning its multi-front battle to finalise its $69 billion acquisition of video game studio Activision Blizzard, but hurdles in closing the video game industry’s biggest deal highlight a difference in opinion between the world’s competition regulators and sound a warning to digital service providers worldwide.
Regulators in the UK, USA and New Zealand, the “No” camp regulators, opposed the deal (with varying success) among fears that Microsoft’s purchase of Activision Blizzard – the world’s second-largest ‘software only’ video game studio – would significantly impact the three-horse race to dominate the console video game market and hamper the growth of the fledgling cloud gaming market.
In contrast, a “Yes” camp of regulators in Japan, China, South Africa, South Korea, Brazil and the EU immediately approved the deal without requiring pro-competition undertakings from Microsoft, rejecting concerns that the deal would hamper the console market or the emerging cloud gaming industry.
As at the date of writing, the Australian Competition and Consumer Commission’s (ACCC) probe into the deal is ongoing, with the Australian regulator (perhaps wisely) choosing to engage closely with the UK Competition and Markets Authority (CMA) and New Zealand Commerce Commission (NZCC) rather than conducting its own, isolated inquiry.
Microsoft’s trouble in finalising the deal serves as a warning to digital providers who offer digital, cross-border products and services – they need to actively manage international regulators, even if they do not have a corporate presence in their market jurisdiction. This is because digital offerings (which are cross-border by nature) are still regulated on a country-by-country basis. Businesses need a cross-border approach to business, and a country-based approach to compliance. Compliance in one jurisdiction does not mean compliance in another.
The $150 billion-per-year video game industry is dominated by a few key players. In the console space the big hitters are Sony, the Japanese manufacturer of the PlayStation series, Microsoft with their Xbox line and Nintendo who dominate the handheld market with their Switch console. While these three powerhouses also produce and publish games themselves, there are also significant “software-only” producers – Tencent Games, Electronic Arts and (relevantly) Activision Blizzard – the publisher of the Call of Duty series, the Diablo series and World of Warcraft.
Over the past decade or so, intense competition in the console arena and the emergence of cloud gaming has resulted in a flurry of acquisition activity. By snapping up smaller developers, the console giants Sony, Microsoft and Nintendo have looked to lock down key IP for future releases, secure popular studios in the industry and access a larger pool of rare development resources. However, with the global console market narrowing almost exclusively to these three players, acquisitions have always been underpinned by competition concerns.
Sony acquired cloud gaming frontrunner Gakai for US$380 million (2012), Insomniac Games (2019), a suite of indie developers and a minority stake in instant messaging platform Discord (2021), 14% of From Software (2022) and ex-Microsoft spin off Bungie (which alone cost US$3.7 billion, 2022). In similar fashion, Microsoft snapped up Minecraft creator Mojang (2014) before acquiring 6 small but well-regarded studios (2018), Obsidian Gaming (2019) and ZeniMax Studios (2020), spending around US$15 billion in the process all up. No one acquisition, however, was significant enough to pique the ears of a competition regulator until Microsoft’s purchase of Activision Blizzard in 2022.
Divergent opinions between national competition regulators
Generally, the concerns of national regulators surrounding the Microsoft – Activision Blizzard deal focus on two key areas:
- The availability of Activision Blizzard games on the Sony PlayStation and, to a lesser degree, the Nintendo Switch (cross-console issue);
- Competition in the emerging cloud gaming industry (cloud gaming issue).
However, these issues have been approached in a variety of ways by national regulators. “Yes” camp regulators reviewed and approved the deal without any significant probe into either the cross-console issue or the cloud gaming issue, and without requiring any further promises from Microsoft that those markets would remain competitive. On the other hand, the “No” camp regulators reviewed the deal in detail, choosing to put it on hold pending further investigation into market competition. The UK CMA has made orders rejecting the merger and indicated it will not change its stance without more extensive undertakings from Microsoft. The US Federal Trade Commission (FTC) has determined to probe the deal further, despite its unsuccessful court challenges.
National regulators from the “Yes” camp are in agreement that the cross-console issue falls away citing the commercial realties of the video game industry and certain undertakings given by Microsoft. Importantly, Sony holds 45% of the console market and, as the South African Competition Commission noted, Microsoft would not have the “ability or incentive to foreclose competing game distributors, particularly Sony and Nintendo”. Simply, most global regulators accept Microsoft’s argument that there is no reason for it to lock itself out of 45% of the market by ceasing to offer key Activision Blizzard games like Call of Duty on the PlayStation. The NZCC has also dismissed the cross-console issue, observing that it is not the role of the NZCC to ensure that specific products (like Call of Duty games) are available to specific consumers (like PlayStation owners) - market competition generally should be the focus.
Concerningly, however, Microsoft has already walked back on a number of commitments it made to the European Commission in relation to the cross-console issue, including by keeping Starfield as an Xbox-only title and reneging on a promise to release AAA title Redfall on all consoles, instead releasing it as an Xbox exclusive. Microsoft’s offer to guarantee 10 years of Call of Duty releases to Nintendo has also been criticized by the “No” camp as tokenistic, given the franchise has never been released on Nintendo’s current hardware. These examples were cited by the UK CMA and the USA FTC in their challenges to the deal.
Cloud Gaming Issue
There are also divergent opinions between regulators on the cloud gaming issue – mainly on whether the deal would hamper competition in, or assist the growth of, the emerging cloud gaming industry. Some regulators who have no concerns with the cross-console issue, like the NZCC, still see the cloud gaming issue as a significant concern. The NZCC’s investigation focused on determining whether the deal would have a material impact on the competition in the cloud gaming space due to its "vertical effects" – supply chain consolidations – in the context of cloud gaming. Unlike other regulators within the “No” camp, the NZCC treated the deal as a vertical merger for the purposes of the cloud gaming issue as Microsoft’s Xbox Cloud Gaming service would undoubtedly benefit from Activision Blizzard content. This, the NZCC suggests, may give Microsoft too much power in the developing cloud gaming space.
On the other hand, the “Yes” camp regulators see the deal as improving the cloud gaming industry and for them, the cloud gaming issue falls away. The European Commission – speaking on behalf of its antitrust regulators – pointed to the youth of the industry and the corresponding commitments offered by Microsoft, determining the deal represented “a significant improvement for cloud gaming as compared to the current situation”. The Japanese and South Korean regulators were also persuaded by Microsoft’s apparent commitment to growing the cloud gaming industry using Activision Blizzard content, outweighing any potential competition concerns.
Industry and consumer concerns
This is the latest development in the ongoing ‘console cold war’ – the battle for domination in the broader video game market between major players like Microsoft and Sony. Currently, the emerging cloud gaming market is easily accessible by smaller developers with limited infrastructure, and can be fairly lucrative. Alongside regulators, both independent developers and consumers have expressed concerns with the Microsoft – Activision Blizzard deal as they are concerned that the cloud gaming market could rapidly morph into a three-party dominated space akin to the console market. The NZCC picked up on this in treating the deal as a vertical merger, identifying hazards in Microsoft’s potential control of the both cloud-based game production and the distribution marketplace.
For consumers and content creators in the $14 billion streaming and eSports industry, the deal represents the latest concern in a long line of game availability and preferential treatment issues. Gamers and content creators are primarily concerned that, following the deal, Microsoft platforms and Activision Blizzard games will not be compatible with third-party products, games may not be available on specific hardware, or that games and services will suffer from integration issues or will attract increased access costs.
These aren’t new concerns. There was a sigh of relief from global gamers when Amazon – without any affiliation with Microsoft, Sony or Nintendo – snapped up flagship eSports and streaming platform Twitch in 2014 for $970 million, putting to rest concerns about potential platform favouritism were one of the console giants to nab Twitch instead. Similarly, Sony’s part-purchase of messaging forum Discord has seen a string of beneficial integrations with both Sony PlayStation and Microsoft Xbox platforms, but has been criticized for its lack of support for Nintendo Switch.
Microsoft’s recent closed-console approach to its games is doing little to allay these concerns, with gamers pointing squarely at their decision to keep Starfall – potentially one of the biggest video game releases of all time – as an Xbox exclusive. Understandably, given Microsoft’s history, consumers are less convinced by Microsoft’s argument that it has no incentive to restrict the supply of Activision Blizzard games to other consoles. These industry concerns have not, however, gone unanswered. Microsoft continues to strike agreements with key international cloud gaming service providers like Nvidia, and has also entered into a flagship, 10-year “game availability deal” with key complainant Sony in relation to AAA titles like Call of Duty.
What next for Australia and the world?
To the credit of the ACCC (and in contrast to many other regulators), the ACCC has so far resisted the urge to conduct an entirely independent assessment of the Microsoft – Activision Blizzard deal. Instead, the ACCC collected submissions from key Australian stakeholders and is now in the process of engaging with key international regulators like the UK CMA and the US FTC. This is consistent with the ACCC’s approach to other deals of similar scale with potentially similar competition concerns.
While we have few details on the extent of the ACCC’s engagement with its international counterparts, a consultative assessment of the deal seems to be the sensible, pragmatic approach. Modern video gaming products and, by extension, the industry are significantly ‘cross-border’ in nature, and a market-by-market approach to landmark, global deals like the Microsoft – Activision Blizzard purchase will likely result in staggered, divergent and ultimately imbalanced protections for consumers in a rapidly growing digital market.
The differences in regulatory approaches to the Microsoft deal highlight a valuable lesson to digital service providers – although their digital offerings are cross-border by nature, the law is not. Regulation (competition and otherwise) is imposed on a country-by-country basis, and does not always react to the needs of providers offering cross-border products and services. As a result, while businesses need to take a cross-border approach to their offerings, they need to take a key-market-based approach to compliance. For advisers, engagement with key-market regulators should be considered as early as possible in acquisition deals, particularly those concerning digital offerings. It may be useful to point clients toward the Microsoft deal to demonstrate the risk posed by misalignment between regulators globally.
Following its probe into the deal, the NZ FCC approved the deal in mid-July 2023. The UK CMA also issued an order approving the merger on 13 October 2023 after negotiations with Microsoft resulted in it entering into a number of pro-competition side-deals. The US FTC announced on 13 October 2023 that, despite the softening of the UK stance, it intends to further challenge the deal. The ACCC is expected to hold off ruling on the deal under the US FTC’s case is closed.
Want to know more?
Reach out with any questions on whether you think Microsoft’s purchase of Activision Blizzard will create a better gaming industry for you.
 Ampere Analysis, 2023.
 “What’s happening with Microsoft’s acquisition of Activision Blizzard” – Oli Welsh, 22 June 2023.
 “Microsoft's Activision Blizzard Deal Could Be Facing its Third Block” - Dominik Bošnjak, 21 June 2023.
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