Post-Brexit the UK Competition & Markets Authority (CMA) has more responsibility and flexibility than ever. In some contexts, the CMA is a thought leader among antitrust authorities. In particular, its market inquiry into the situation surrounding mobile browsers and cloud gaming is a great initiative. Today, however, the CMA has shocked me. No, it's not surprising in the slightest that a $70 billion acquisition by a Big Tech company--here, Microsoft's purchase of Activision Blizzard--gives rise to an extended (Phase 2) review, as there has been an underenforcement in other contexts (such as Facebook's WhatsApp and Instagram acquisitions). What I find truly regrettable, however, is that the CMA risks its reputation as a competent enforcer of competition law in the technology industry by developing some theories that are partly just wrong on even the most basic facts, and where that is not the case, the theories still don't make sense for other reasons.
The CMA clearly can do better than that. The Microsoft-ActivisionBlizzard merger will (have to) be approved when all is said and done. Microsoft was the first client I ever disclosed on this blog (more than ten years ago); and back in 1995, I was the first person to work (on a freelance basis, but still) with Blizzard Entertainment outside the United States. After all that went wrong at Activision (no need to go into detail here), I do want the Blizzard brand--and especially those game brands to whose success I personally contributed (Warcraft, Starcraft, Diablo)--to find a safe and stable new home. But I'm an independent small app developer now, not a Blizzard sales & marketing consultant, and it is primarily because of the important role that I hope the CMA will play in the mobile ecosystem context that I'm worried about the CMA's credibility in light of today's decision.
In today's announcement, the CMA incredibly says it is "concerned that Microsoft could leverage Activision Blizzard’s games together with Microsoft’s strength across console, cloud, and PC operating systems to damage competition in the nascent market for cloud gaming services"--which I'll comment on further below--and believes an in-depth (Phase 2) investigation is warranted unless Microsoft and Activision Blizzard "submit proposals to address the CMA's concerns" on or before 8 September 2022. Frankly, I can't see why the parties should do that as the CMA has simply failed to state any such thing as a credible theory of harm. This means the process is presumably going to continue, but no one really expected the deal to be closed this year. It may not take until mid-2023 (as some believe), but it's certainly going to take time for political rather than legal reasons.
Let's start with something the CMA does not (as it cannot) claim: that there wouldn't be enough competition in the games market. The first question to ask about a merger is always whether it results in horizontal concentration. Other than Sony--the sole complainant whose opposition to the deal is publicly known at this stage by virtue of a pretty transparent process in Brazil--trying to define Activision's Call of Duty as a single-product market, there's no indication that anyone even tries to make that kind of argument. The Brazilian antitrust agency (Conselho Administrativo de Defesa Econômica, or CADE) received various response according to which there's going to be enough competition in the games market post-merger. Just think of Sony, Tencent, Electronic Arts, Epic Games, and so forth.
By contrast, there hasn't been a huge number of singificant players in the gaming console market for a couple of decades, as the CMA itself states. The CMA then expresses a vertical foreclosure concern "that if Microsoft buys Activision Blizzard it could harm rivals, including recent and future entrants into gaming, by refusing them access to Activision Blizzard games or providing access on much worse terms."
That is a non-issue. Right after the deal was announced in January, Microsoft made it clear that Activision Blizzard would support the PlayStation just like before. In a blog post published today, Microsoft Gaming CEO Phil Spencer reiterates that commitment and, once again, recalls that Minecraft, which Microsoft acquired eight years ago, "continues to be available on multiple platforms and has expanded to even more since [that acquisition]." In other words, Microsoft's words and its past actions prove that this transaction--which Microsoft has explained is very much about strengthening its position in mobile gaming--is not part of a scheme to harm Sony.
So, in order to find another excuse for the politically motivated decision not to grant unconditional fast-track clearance, the CMA decided to come up with a contrived and contorted theory of harm involving divergent markets:
"The CMA has also received evidence about the potential impact of combining Activision Blizzard with Microsoft’s broader ecosystem. Microsoft already has a leading gaming console (Xbox), a leading cloud platform (Azure), and the leading PC operating system (Windows OS), all of which could be important to its success in cloud gaming. The CMA is concerned that Microsoft could leverage Activision Blizzard’s games together with Microsoft’s strength across console, cloud, and PC operating systems to damage competition in the nascent market for cloud gaming services."
If the passage I just quoted doesn't convince you, or maybe doesn't even make sense to you, then that's consistent with my reaction when I read that part. The combination of "a leading [something]" (twice) and "the leading [something]" isn't necessarily a competition issue. The question is whether there's a risk of abusing market power in one field in order to unfairly gain market share in another. I then read the official summary of today's decision, looking for an answer to the question of why Windows and Warcraft--and Azure--belonging to the same company should raise concerns.
Paragraph 32 of that summary is--sorry to say so--completely off-base in the eyes of anyone who knows a thing or two about the technological and commercial realities involved:
"Microsoft already has a combination of assets that is difficult for other cloud gaming service providers to match. By having a large and well-distributed cloud infrastructure, Microsoft will be able to host games on its servers on preferential terms and reach gamers throughout the world without having to pay a fee to third-party cloud platforms. By having Windows, the OS where the vast majority of PC games are played, Microsoft can stream games to Windows PCs without having to pay an expensive Windows licensing fee and may be able to design and test games made for Windows more effectively than rivals. And by having an existing console ecosystem, Microsoft has an existing user base of gamers to which it can promote its cloud gaming services, as well as a range of popular games that it can offer."
That's just so wrong. It's like it comes straight from an alternative universe.
Amazon's AWS is bigger than Microsoft's Azure, and hosts many games. And as an app developer (who made and published two game apps) I'm well ware of how Google has been promoting its Google Cloud Platform to game makers. Also, a Google-Nintendo joint venture known for Pokémon GO uses Google's cloud infrastructure, and no one ever expressed antitrust concerns over that--or will the CMA now investigate Niantic's relationship with Google?
There's plenty of competition for game developers as cloud hosting customers, which means those services are available at competitive rates.
While the cloud part is weak, the worst is yet to come: the part about Windows: "By having Windows, the OS where the vast majority of PC games are played, Microsoft can stream games to Windows PCs without having to pay an expensive Windows licensing fee [...]"
This is simply absurd. How can a competition authority that respect itself say something like that?
Anybody can develop a game service client for Windows and publish it without paying Microsoft a cent. Well, for development and testing you do need Windows, but that's just one license each per developer, but you can then distribute your client to as many users--millions and millions of them--as you like, at no extra cost.
This is not the mobile world, where Apple and Google are gatekeepers and retain 30% of in-app purchasing and subscription revenues. Windows is not a walled garden.
What the CMA may have meant is something different than what it actually said. Maybe the CMA means streaming, and if you stream a Windows game, you need a Windows instance in the cloud--but you can also just write your game for another operating system, such as Linux, and stream it to a Windows PC. What you stream is just video and audio data, so you don't need the same operating system on both sides. You can stream a Windows game to an iPhone, or a Mac game to a Windows PC.
The sentence continues as follows: ". . . and may be able to design and test games made for Windows more effectively than rivals." Note the "may": they don't know. They just suspect. Yeah, let's just have a Phase 2 investigation, doesn't matter whether there is the slightest factual basis "because $70 billion and Big Tech."
As a software developer, I know this is ridiculous. I'm not aware of any Microsoft game ever having had a feature or other characteristic (such as superior performance) that was attributable to the fact that Microsoft owns Windows. Instead, Microsoft gives game developers access to PC hardware--which, again, is different from what Apple does on iOS. It's a level playing field. About 30 years ago, there were complaints by productivity software makers that Microsoft didn't provide all the documentation to them that they'd have liked to have. Maybe that was the case, or maybe it wasn't--but no one has made a credible claim to that in a couple of decades.
Finally, the CMA says that "by having an existing console ecosystem, Microsoft has an existing user base of gamers to which it can promote its cloud gaming services, as well as a range of popular games that it can offer." Sony also has an existing user base of gamers owing to its console, and keeps buying game studios. Interestingly, just like Microsoft's primary reason to buy Activision Blizzard has to do with mobile gaming, Sony announced a few days ago that it is buying a mobile game maker named Savage Game Studios.
A lot of companies have access to gamers. Console makers are one such category of companies. The CMA apparently can't raise any concerns that are really specific to this particular transaction.
I just checked on the ATVI stock price, and the UK announcement is not having a significant impact pre-market. Phase 2 was investors' operating assumption as I heard from Wall Street friends. My personal opinion here is that the glaring weakness of the CMA's "case" is actually good news for ATVI longs. It remains to be seen what other regulator will say, but so far all that is known is that the FTC's excuse for an extended review is centered around novel and unspecific theories, and the UK CMA's announcement today serves to confirm that there aren't any real issues. The takeover was announced 7.5 months ago, and during all of that time no one has given a valid reason for a blocking decision.
I heard that New Zealand's ComCom will also make its Phase 1 decision tomorrow. [Update] That one has been pushed back by a week. [/Update] I'm going to follow the process with great interest, as an app developer, as someone who has done consulting work for Microsoft as well as Blizzard, and as someone who loved Activision games like River Raid and Keystone Kapers (on an Atari 2600 in my early teens) and played Candy Crush up to level 1431 a few years ago as you can see in the following screenshot I just made:
