Some Good News from the UK

No, King Charles has not abolished the monarchy, but the UK Competition and Markets Authority has blocked Microsoft's merger with Activision Blizzard.

Given Microsoft's current position, it is a major console manufacturer, Windows is a major gaming platform, it's a major player in cloud computing, and it dominates cloud gaming, it's buying up the publisher of Call of Duty, Tony Hawk, Warcraft, Candy Crush, and Guitar Hero creates significant competion issues.

The FTC is suing to prevent the merger as well:

Today I’m writing about the UK’s Competition and Markets Authority’s move to block Microsoft’s takeover of Activision in a $69 billion deal. It’s hard to overstate the importance of this challenge, and I’m going to focus on the logic of the CMA, and what it means for the development of technology going forward.

Here’s what happened. Microsoft was trying to buy Activision to expand its gaming portfolio, which it had rolled up with a series of acquisitions. Activision would have been its largest purchase to date. What was the rationale for the acquisition? As I wrote when the deal was announced:

Activision has important gaming franchises, like Call of Duty, Candy Crush, Warcraft and Tony Hawk. With this purchase, Microsoft will be the third biggest gaming firm in the world, controlling the X-Box console platform and a lot of game development and intellectual property (as well as Activision’s in-game advertising business line). The key strategic rationale behind this deal is to build up a walled garden for Microsoft’s gaming division, which runs a Netflix-style subscription service called Game Pass.

Last year, the Federal Trade Commission sued to block the deal, arguing that Microsoft would foreclose its games to its rival in game platforms, Sony.

“Microsoft has already shown that it can and will withhold content from its gaming rivals,” said Holly Vedova, Director of the FTC’s Bureau of Competition. “Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”

The idea was that Microsoft would make games exclusive to its own platforms, in order to block rivals from ‘must-have’ content in the gaming industry. A lot of people didn’t understand why Microsoft’s deal was so dangerous, because Sony is both bigger in the gaming space, and has a lot more game exclusives.

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This dynamic is very clear when examining how the CMA thought about its challenge. Originally, in its statement of objections, the CMA claimed that Microsoft could gain market power in both consoles and cloud computing. But then in March, it dropped its claims about consoles, effectively brushing aside Sony’s worries. A lot of observers thought Microsoft would then be able to get its deal approved, assuming the logic for gaming on cloud computing is similar to that of consoles.

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While this may sound like a compelling rationale, the CMA was unpersuaded, noting that “there seem to be other, less anti-competitive ways, through which Microsoft could reasonably attempt to enter this market, such as by licensing mobile gaming content from publishers.” Basically, you don’t have to own games to sell them through an app store, unless you are trying to monopolize a vertically integrated sector.

So what happens now? Well, Microsoft can appeal, and Brad Smith says they are planning to do so. Appeals are tough in the UK. And Activision must agree to that, since an appeal will take the merger past the merger agreement due date. Moreover, Activision has a $3 billion break-up fee, and has already been planning a strategy based on the assumption the deal won’t go through. So we’ll see. Meanwhile, the FTC is still gearing up for trial in the U.S., and this move helps American enforcers in their arguments here.

Your mouth to God's ear, Mr. Stoller. 

We desperately need aggressive anti-trust enforcement, including criminal penalties against executives who do this.