EU: The Microsoft/Activision collision - why did the EU and the UK disagree on this deal?

On 15 May 2023, the European Commission (“Commission”) cleared the Microsoft/Activision deal subject to remedies. However, only a few weeks earlier, the UK Competition and Markets Authority (“CMA”) had prohibited the transaction, thus following in the footsteps of the US Federal Trade Commission, which sued to block the merger in December 2022. Other jurisdictions such as South-Korea, Japan, China, South-Africa, Brazil and Saudi-Arabia, have cleared the merger. In the meantime, Microsoft has appealed the CMA’s decision.

Both Microsoft and Activision Blizzard (“Activision”) develop and publish games for PCs, consoles and mobile devices, and distribute games for PCs. Microsoft already owns 24 game development studios and offers the popular Xbox console. The $69 billion bid would allow Microsoft to add some of the world’s most popular games such as Call of Duty, Candy Crush, World of Warcraft to its collection.

While much ink has already been spilled over this deal, the divergent approach of the CMA and the Commission, in both cases following an in-depth investigation, merits closer attention. The CMA has already published the full decision; the Commission has issued only a press release so far.

To address the concerns raised by the UK and EU competition authorities, Microsoft offered similar commitments in both procedures. While the CMA dismissed the proposed remedies, the Commission considered them as sufficient and even touted them as “a significant improvement for cloud gaming”.

This is the second post-Brexit transaction in which the EU and UK authorities come to a different conclusion. Also in the 2022 Cargotec/Konecranes case, the Commission accepted commitments while the CMA refused to grant clearance, eventually forcing the parties to abandon the deal.

Competition concerns and remedies

On most issues that they investigated, the Commission and the CMA came to identical conclusions. Both authorities found that Microsoft would have no incentive to withdraw Activision games from competitor consoles, such as PlayStation (Sony), Switch or Wii (Nintendo). They also agreed that Activision would, in any event, not have made its games available for multi-game subscription services, so the situation for third-party providers of such services would not change post-merger.

The authorities’ investigations therefore focussed on the cloud gaming market. Cloud gaming allows players to stream games to their devices, making large downloads and high hardware requirements obsolete, thus creating more accessibility at a lower cost. Both authorities were concerned that Microsoft would make Activision titles exclusive to its own cloud gaming service, thus restraining access to Activision games and further strengthening Microsoft Window’s position as an operating system.

In the UK proceedings, Microsoft offered to license Activision games to certain cloud gaming providers free of charge for a period of 10 years. Microsoft also offered to update the consumer licenses on its website, allowing buyers of an Activision game in online stores designated by Microsoft to stream that game to certain cloud gaming services.

According to the CMA, the proposed remedies contained several shortcomings:

  • First, the remedy was limited to a model whereby gamers have purchased or subscribed to games. This would prevent cloud gaming service providers from making the games accessible through other ways (e.g. multi-game subscription services, early-access content or joint marketing arrangements).
  • Second, the remedy did not ensure that future Activision games would be compatible with PC operating systems other than Windows.
  • In addition, the CMA considered the ten-year duration of the commitments too short, and had various other concerns regarding the implementation, oversight, conflict-resolution and enforcement of the remedies.

Overall, the CMA considered the proposed commitments as too static and unable to account for changes in the market over time.

Based on the Commission’s press release, it seems that the remedies Microsoft offered to the European Commission were broader and did not include some of the limitations pinpointed by the CMA. Microsoft offered: 

  • A free license to EEA consumers, allowing them to stream, via any cloud game streaming services of their choice, all current and future Activision PC and console games for which they have a license;
  • A corresponding free license to cloud game streaming service providers to allow EEA consumers to stream any Activision PC and console game.

Based on positive feedback from market players and stakeholder, the Commission regarded these commitments as fully addressing its concerns and as even having procompetitive effects. It noted that the commitments would “unlock significant benefits for competition and consumers, by bringing Activision's games to new platforms, including smaller EU players, and to more devices than before.”

In a rare comment on a Commission decision, the CMA noted however that the remedy accepted by the Commission “replaces an open and competitive market with one subject to ongoing regulation of the games Microsoft sells, the platform on which it sells them, and the conditions of sale”. The CMA also warned about a high circumvention risk.

Eyes on the cloud

It is remarkable that the impact of the deal on cloud gaming and thus on a very small market may ultimately determine whether or not the largest tech transaction of the decade will see the light of day. Cloud gaming, a nascent market that is still at the very early stages of development, currently accounts for only 1% of the global market for game distribution.

However, the authorities’ focus on this market is not surprising. In recent times the Commission has taken a significant interest in cloud markets. Moreover, protecting nascent and fast-growing markets is an important policy priority of both the Commission and the CMA.

Disagreement despite cooperation

The different attitude of the two authorities is striking. One could be tempted to explain the difference by the fact that Microsoft offered more generous remedies to the Commission, likely influenced by the CMA’s decision. However, the CMA has made clear that it considers even the wider remedies offered in the EU proceedings as insufficient.

The different conclusions are also not due to a lack of communication or cooperation between the authorities. The case was discussed extensively between the Commission and the CMA. Other authorities, including those of the United States, Canada, Australia, and New Zealand also cooperated on the Microsoft/Activision deal. While surely they all shared the same “call of duty”, to quote Vestager, the CMA and the US Federal Trade Commission did not reach the same conclusion as their peers.

One element that certainly played a role is the Commission’s greater openness to behavioural remedies. In principle, the Commission has a clear preference for structural remedies: in the past five years, 80% of conditional clearances have relied on structural remedies. However, the Commission has also accepted behavioural remedies, which typically consisted in granting access to technology or assets. By contrast, the CMA has made it abundantly clear that it is very sceptical of the effectiveness of behavioural remedies, noting that it prefers prevention over regulation and that behavioural remedies are often high-risk and low-reward.

What’s next?

It remains to be seen whether the deal will go through if Microsoft’s appeal against the CMA decision is not successful. Unlike for the United States, where Microsoft indicated that it would proceed despite the Federal Trade Commission’s disapproval, Microsoft has warned shareholders that the UK’s objection could effectively scupper the entire transaction.

For more information, please contact Anne Federle or Ruben Verdoodt

 

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