Activision Blizzard, blocked
$70 billion merger shockingly candy-crushed over cloud gaming
If you bought Activision Blizzard stock this week assuming the Microsoft deal was going through, well, think again. Shares are down over 10% today after the U.K.’s antitrust regulator, the Competition and Markets Authority, blocked the deal.1
Rumors swirled earlier this week that the U.K. was all set to approve the nearly $70 billion deal on Wednesday, which would make Activision Blizzard stock worth $95 a share. So what went wrong for Microsoft?
The U.K. thinks if Microsoft gets to buy Activision Blizzard, competition will be stifled, it wrote in a decision viewed by this newsletter. It all boils down to cloud gaming, which the U.K. regulator has repeatedly flagged as a big concern.
“The CMA has prevented Microsoft’s proposed purchase of Activision over concerns the deal would alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for UK gamers over the years to come,” the CMA wrote in a statement.
The European Union’s decision on the merger is due later this month and the U.S.’s Federal Trade Commission’s lawsuit moves along in August. Originally, Microsoft and Activision had hoped for the deal to close by June, pending regulatory scrutiny. Last October, I wrote up this recap of the entire deal for The Washington Post’s tech policy newsletter, in case you need a refresher.
Why block the merger? The CMA still thinks that Microsoft could make big money making Activision games exclusive to its cloud gaming service. Games like Call of Duty, Overwatch and World of Warcraft would strengthen Microsoft’s market advantage and risk hurting innovation, according to the regulator. It said that harm to the consumer would be substantial and not outweighed by the benefits of Activision games on Game Pass.
Microsoft president Brad Smith said in a statement that the company plans to appeal. He added, “The CMA’s decision rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom... 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.”
Remember all those December headlines where Microsoft promised it would keep Call of Duty on the Nintendo Switch, Steam, and other platforms for ten years? They were a bid to prove to the CMA that this worry was unfounded. The CMA ruled that the impact of these agreements was “highly uncertain” and benefits to consumers would be “relatively small.”
Microsoft was successfully able to convince regulators it would keep Call of Duty on PlayStation as that’s a valuable source of revenue, but it did not convince regulators on cloud gaming. The CMA pointed to Microsoft’s ownership of Windows and its cloud computing product Azure.
In an effort to soothe regulators, last October Microsoft went even as far as calling cloud gaming technology nascent, “immature” and “unproven,” a marked difference from how it described cloud gaming back in 2019’s E3 annual gaming conference. Back then, when I was CNN’s sole gaming reporter, I attended a demo where Microsoft showed off its cloud gaming service Project xCloud and claimed it could play 3,500 games in the Xbox gaming catalogue.
Last year, I wrote about how cloud gaming was kind of a red herring for antitrust regulators. Back then, it was obvious to me that Project xCloud, Xbox’s big cloud gaming project, hadn’t taken off. To center the entire acquisition conversation on cloud gaming, like Google Stadia (RIP) and Nvidia GeForce Now, did not make intuitive sense. At a glance, it sounded like the CMA was focusing on an entirely irrelevant portion of the deal and that it needed to gain a stronger understanding of the industry.
But the way that analysts at investment bank Jefferies described the deal last month illuminates the CMA’s thinking a bit more. In a March report, Jefferies likened Call of Duty to Michelin star restaurant food and the Xbox Game Pass to an “all-you-can-eat buffet.”
The concern is that a large fish in a small pool will negatively disrupt the other players involved, even if Microsoft has claimed it would not monopolize Call of Duty. I’ve reached out to the CMA to ask if it considers Xbox Game Pass to be cloud gaming and will update this newsletter when I hear back. If it does consider Game Pass to be cloud gaming, that would explain a LOT of why this merger was blocked. But if it doesn’t… well, it’s worth noting that cloud gaming is still a single digit percentage of the entire gaming industry.
Activision Blizzard spokesperson Joseph Christinat said in a statement: “The CMA’s report contradicts the ambitions of the U.K. to become an attractive country to build technology businesses. 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.”
Activision Blizzard CEO Bobby Kotick emailed employees on Wednesday that “this isn’t the news we wanted — but it is far from the final word on this deal.”
Microsoft has a month to appeal the decision with a tribunal, which could take months to move forward.
Microsoft reported earnings on Tuesday, noting that hardware sales for Xbox consoles dropped 30% and gaming revenue fell 4% compared to the same time period last year. Activision Blizzard reported that sales grew 25%, compared to an industry single digit decline, citing the ongoing success of Candy Crush and Call of Duty.
Jefferies wrote on Wednesday that Activision Blizzard is likely to be valued at around $80 (down from the deal’s $95 a share) given the success of Modern Warfare 2, Overwatch 2, World of Warcraft: Dragonflight and positive expectations for Diablo IV, to be released on June 6. It predicts that the deal may be off the table.
“It is ham-fisted to block a deal that would improve competition in literally every other market based on the idea that cloud gaming is going to replace the console, which it won’t, or is equivalent to 3% of the global market, for fear of discouraging Amazon and Sony from investing,” said Joost van Dreunen, a lecturer on the business of games at the NYU Stern School of Business.
TL;DR Highlights
Call of Duty potentially getting removed from PlayStation was ultimately not the CMA’s reason for rejecting the deal, after months of Microsoft reassuring the CMA not to worry on this point
I’ll be monitoring what happens to the EU’s decision later this month and the FTC lawsuit blocking the merger later in August
I’m curious to see if the CMA considers Xbox Game Pass to be cloud gaming
I’ve written about the internal development process of Diablo IV and how employees’ stock benefits will change depending on if the merger goes through. Watch this space for more on that
Antitrust experts I reached out to this week were traveling. I’ll be in touch with them soon about greater policy implications of today’s news
We’re four months into 2023 and gaming news is back and bigger than ever. Cheers for now! This newsletter will be back very soon with more to come.
A note on publishing timing. I could’ve published this piece at 7AM today when the CMA first emailed me, it’s true. However, as a result of being able to publish whenever I want, you get well thought out insights, and this is a more sustainable blog in the long run.