UK blocks Microsoft-Activision deal to protect cloud gaming

Today, the United Kingdom blocks Microsoft’s proposed $69 billion acquisition of Activision Blizzard on the grounds that it would hurt cloud gaming.

The original deal, proposed more than a year ago, would have been the largest acquisition in history. But, according to the UK’s Competition and Markets Authority, the deal could undermine the cloud gaming market before it got off the ground, hurting the competition.

Microsoft launched its cloud gaming service in 2020 as Project xCloud, which is now part of its Game Pass Ultimate service. As the UK CMA pointed out, cloud gaming allows consumers with high-speed broadband to avoid paying for a game console. Instead, they can stream games over the Internet, playing them on a remote server. Most of Microsoft’s Game Pass Ultimate services (available for cheap if you know how) are available via cloud gaming. The CMA was afraid of Activision launching its own cloud gaming service. Acquiring Activision would squash that competition, the CMA said.

“Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities,” the UK CMA said in a statement. According to the CMA, cloud gaming will be worth 1 billion pounds in the UK by 2026.

Microsoft apparently tried to bargain, offering a counteroffer that would govern what games would be available on what platforms over a ten-year period. The CMA ultimately rejected it on the grounds that it did not address cloud gaming, wasn’t sufficiently open to other operating systems, and would “standardize the terms and conditions on which games are available.”

The agency also had concerns with Microsoft raising the price of Game Pass, post-merger. “Microsoft engaged constructively with us to try to address these issues and we are grateful for that, but their proposals were not effective to remedy our concerns and would have replaced competition with ineffective regulation in a new and dynamic market,” said Martin Coleman, chair of the independent panel of experts conducting the investigation for the U.K.

So, what now?

Microsoft president Brad Smith said in a statement that the company will appeal. “We have already signed contracts to make Activision Blizzard’s popular games available on 150 million more devices, and we remain committed to reinforcing these agreements through regulatory remedies,” he said.

History does offer some insight on what Microsoft could do. In 2009, Microsoft shipped a version of Windows 7 and 7 E to Europe to address concerns that Microsoft was illegally bundling Internet Explorer inside the operating system. But how Microsoft could apply that model to a game service (pull Game Pass out of the UK? Refuse to offer Activision games to UK cloud gaming audiences?) is unclear.

It’s worth noting that the UK isn’t the only government against the deal –the U.S. Federal Trade Commission is too.

Smith’s statement does imply that Microsoft intends to go forward with the Activision Blizzard deal. Whether that’s still possible or not is in question.