Some observers have welcomed the deal, arguing that regulators have allowed tech companies to amass too much power by scaling up through acquisitions. “We think there has been more than a decade of under-enforcement,” says Max von Thul, director of Europe at the Open Markets think tank, referring to previous decisions to allow Facebook to merge with WhatsApp and Instagram. “Our concern would be that by having the Activision portfolio, Microsoft would gain an undisputed advantage in this market over other cloud gaming services.”
Others, including, unsurprisingly, Microsoft, challenged the ruling, saying the CMA failed to understand how the cloud gaming industry is structured. “The CMA decision rejects a pragmatic path to address competition concerns and discourages technological innovation and investment in the UK,” Brad Smith, Microsoft vice president and president, said in a statement. Smith said the CMA’s decision was based on a “flawed understanding of this market and the way the relevant cloud technology actually works.”
Joost Rietveld, a professor at University College London who studies technology platforms, argues that cloud gaming is not a separate market. “There are very different companies using cloud gaming in very different ways and targeting really diverse customers,” he says. “They’re bundling all of these deals together and it’s not clear if they’re actively competing with each other and if there’s this unified harm to consumers if this deal goes through.”
The merger has already been approved by the competition authorities of Japan, Brazil and South Africa. The European Union is still deliberating on the deal, while the US Federal Trade Commission filed a lawsuit to block the merger last August. Evidentiary hearings in that case are scheduled to begin in August of this year. Some in the tech sector see the UK regulator’s move as something of a power play.
The CMA’s decision comes days after the UK government announced it would give the agency new powers to fine companies up to 10 per cent of their global revenue if they break local competition rules, and created a new “Digital Markets Unit” which is supposed to protect consumers and improve competition within the UK tech sector. That has caused some alarm in the industry. “The CMA has become increasingly prominent as an enforcer of competition around the world in recent years, especially after Brexit,” says Richard Pepper, a partner at the Macfarlanes law firm. “They have been seen more and more as aggressive in controlling mergers. But this is really the biggest deal they’ve blocked.”
The decision doesn’t spell the end of Microsoft’s move into cloud gaming, but it will likely slow it down. In recent years, the largest gaming companies have often sought growth through acquisition, according to Daniel James Joseph, a senior lecturer at Manchester Metropolitan University who specializes in the gaming industry. “All the data, almost every year, points to the dynamic that merger represents: the big ones get bigger,” he says. “Acquisitions are the name of the game for industry growth these days, rather than, let’s say, innovation.”
The company can still grow, but not as easily. “For Microsoft’s cloud gaming ambitions, even if this setback proved fatal to the Activision deal, there are plenty of other ways to expand into that market, for example by acquiring smaller game publishers,” he says. Alex Connock, Senior Fellow in Management Practice. at the Said Business School of the University of Oxford.
But scaling slowly may not be what Microsoft wants to do. His move to cloud gaming wasn’t just about building his entertainment business. Cloud infrastructure is a business at scale: companies need to grow and keep growing. Running your own cloud services, including data-intensive ones like gaming, is a big deal.
Microsoft is already a cloud computing giant, through its Microsoft Azure cloud computing business. In cloud infrastructure services, Microsoft and Amazon have a combined 60 to 70 percent market share, according to an April report. report by the UK communications regulator. UC Berkeley’s Webber says boosting cloud gaming could strengthen Microsoft’s position in the market by fueling demand for cloud services. “The higher the demand, the better the business,” he says. “Cloud gaming already is and will become a much larger source of demand for cloud infrastructure.”
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