What is at stake now after the UK Competition & Market Authority's unbelievable decision (summary (PDF)) to block Microsoft's acquisition of Activision Blizzard King (ABK) is not just the credibility of that particular regulatory agency and its leadership. The more fundamental question that will have to be answered now is whether the rule of law is intact. Can a government agency that appears to be out of control post-Brexit, and to make decisions even when it doesn't seem to understand the technologies involved, do whatever it wants?
On September 1, I saw the CMA on the wrong track (UK antitrust authority gets basic facts wrong as it declines to approve Microsoft's purchase of Activision Blizzard on fast track: extensive review was expected, but reasoning is nonsensical). Almost eight months have passed since then, and what looked just like misconceptions in the beginning now actually appears to indicate a radical agenda as well as a lack of technological competence.
There was hope. Temporarily. The CMA recognized a little over a month ago that there was no vertical foreclosure concern with respect to the console market (as withholding Call of Duty from the PlayStation would be grossly unprofitable for Microsoft even if a few gamers switched consoles). The CMA had made a mistake when calculating the costs and benefits of foreclosure--a mistake that it corrected, which was actually honorable but changes nothing about the fact that the CMA does not appear to do top-notch work as a competition regulator, at least with respect to complex technology industry cases.
To be fair, the CMA didn't even get major cases as long as the UK was an EU Member State. All major tech competition matters were decided in Brussels, where the CMA basically just had an observer status. Post-Brexit it has more power than before, but that power may just be too tempting for some people--a temptation that leads them to make bad decisions at times. The CMA may just have acquired too much additional power overnight, and maybe the politicians who decided on the appointments did not always choose persons who would protect UK consumers but also have a modicum of regulatory humility.
The CMA doesn't understand technology (a cloud service like Azure is a commodity, most major games actually run on the Google Cloud Platform anyway), didn't understand foreclosure economics well enough to avoid the mistake I just mentioned, and there are also signs that the CMA doesn't correctly apply the legal framework. The CMA got overruled by the Competition Appeal Tribunal (CAT) last month for blatantly disregarding certain statutory time limits in a case involving Apple.
The CAT is where Microsoft and Activision Blizzard are headed. Shortly after the CMA published its outrageous decision, Microsoft and Activision Blizzard announced via Twitter that they would appeal:
We remain fully committed to our acquisition with @ATVI_AB and will appeal today's determination by the CMA. Here's our statement. pic.twitter.com/ylvDP5RUqQ
— Brad Smith (@BradSmi) April 26, 2023
The CMA’s report today is a major setback for the UK’s ambitions to be a tech hub, and we will work with Microsoft to reverse it on appeal.
— Lulu Cheng Meservey (@lulumeservey) April 26, 2023
This report is also a disservice to UK citizens, who face increasingly dire economic prospects, and we will need to reassess our growth…
Microsoft's announcement says "the decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works." I, too, struggle with some of the CMA's arguments. I'll analyze and comment on the CMA's decision in future posts, but for now let me just give one important example that relates to what Microsoft indicates will be a key issue on appeal:
"Microsoft [...] has other important strengths in cloud gaming from owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming)"
The Xbox has a small market share compared to Sony, and the CMA is apparently more sympathetic to the dominant market leader, Sony, than to competition and consumer interests. Windows is a totally open system, and in order to offer games over the cloud that run on Windows, one doesn't even need Windows (the server can simply run on Linux as I already stated on September 1, 2022). And Azure is a commodity as I've said before. It's not like cloud operating costs are a huge factor: content is king when it comes to cloud gaming. Cloud services are, from a cloud gaming perspective, just a limited cost of doing business.
The CAT's standard of review is very deferential, but not infinitely deferential. In the Apple case, the CMA made a procedural error that was overruled rather quickly. Microsoft's announcement today mentions nothing procedural, though it's too early to tell whether the appeal will raise procedural issues as well. The CMA's substantive findings are reviewed under the "irrationality" standard. The CMA's position on cloud gaming--and its decision to block a merger over a nascent market (where there are new entrants all the time) after actually recognizing that its key concern (foreclosure in console market) was based on its own mistake--is irrational even in a literal sense. The way the CAT applies the term, the CMA will have a hard time explaining to the CAT that its decision was reasonable.
The CAT will see that the people working for the CMA on this deal weren't even capable of correctly calculating foreclosure costs when they wrote up their provisional findings (a very important document in the CMA process). That's not going to look good, though in a strictly legal sense it's not going to be relevant, just like it shouldn't be relevant (and hopefully wasn't relevant to the CMA) that Sony Interactive Entertainment CEO Jim Ryan is a Brit.
The bigger issue is this: the CAT will easily see that the CMA's reasoning concerning Microsoft's "other important strengths" is nonsensical, and it will particularly see that if a regulator could just block a deal based on totally speculative concerns about a nascent market, many more mergers would have to be blocked.
The CMA decision is so utterly unreasonable that only a successful appeal--or a settlement along the way--has the potential to restore my faith in the UK as an antitrust jurisdiction. It is now about the rule of law. Otherwise the CMA will know that it can get away with whatever arbitrary and capricious decisions it makes. This will also have political implications, and regardless of what happens here, UK politicians should see now that the so-called "judicial review" standard in the UK may lead to institutionalized regulatory excess.
The deal was cleared by other jurisdiction (in chronological order: Saudia Arabia, Brazil, Serbia, Chile, Japan, South Africa). It will be cleared by others in the weeks and months ahead. And I still believe it will ultimately be cleared in the UK. Maybe they'll work out a settlement soon. Otherwise Microsoft and Activision Blizzard will have to agree on an extension of the merger agreement. Some activist shareholders may now push Activision Blizzard to take the $3B breakup fee, but given that the CMA's decision is nonsensical, an extension would be logical.
For roughly a decade, Microsoft had been more cooperative with regulators than any Big Tech company in history. The CMA decided not to reward a cooperative and solution-oriented attitude. Now Microsoft has no other choice but to fight back, and to fight back really hard. In the alternative, it would become the target of regulatory overreach on multiple fronts.
What about other pending reviews and cases?
Let's look at the implications quickly, jurisdiction by jurisdiction:
European Union: The European Commission has a deadline on May 22. EC antitrust chief Margrethe Vestager stated in an interview a few months ago that different outcomes in different jurisdictions are possible. I still believe the EC will clear the deal on one basis or another next month. That will weaken the CMA's position.
United States (FTC): For FTC chair Lina Khan, the CMA's decision isn't really good news. Political pressure will grow because the FTC has done damage to two U.S. companies--to the benefit of Asian rivals--by bringing a frivolous complaint instead of working out a reasonable solution. More and more people will now say that Lina Khan is a liability for the American economy. In purely procedural terms, the probability of the August trial before the FTC's in-house judge is now rather high. If the deal had been cleared by the CMA today, and subsequently by the EU, I believe Microsoft would have consummated the transaction, the FTC would not realistically have obtained a preliminary injunction, and then the FTC would have given up just like in the Meta-Within case.
United States (private lawsuit): At this point, closing is not imminent, so Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California doesn't have to resolve the motion for a preliminary injunction in the near term. The motion was filed on Monday, and Microsoft's opposition brief would normally be due on Friday, May 5, but I guess the briefing process will either be put on hold or at least the briefing schedule will change. I doubt that there will still be a PI hearing on May 12.
Australia and New Zealand: The regulators in those jurisdictions wanted to await the outcome in other jurisdictions. Their historical ties with the UK don't mean that they're necessarily going to agree with the CMA. I believe they'll more likely clear the deal after the EU has done so.
The saga could have been over soon, but instead it looks like it could take longer than expected, if not much longer. That is a shame, but I still hope to see Microsoft's plans for a universal mobile app store materialize. That is one of the important procompetitive benefits of the transaction that the CMA, for whatever reason or no reason, doesn't seem to care about.
I'll be sure to comment on the CMA decision in more detail in the coming days. Please note that I comment more rapidly and frequently via Twitter.
