As predicted by Reuters and Bloomberg, the European Commission's antitrust division under Executive Vice President Margrethe Vestager has just announced--one week ahead of schedule--its decision to approve Microsoft's acquisition of Activision Blizzard King (ABK) subject to conditions.
Sony's console market theory of harm has been rejected: not a single regulator (other than the FTC) has so far seen any foreclosure risk there. The European Commission has now cleared the transaction based on Microsoft offering free streaming licenses to end users of Activision Blizzard console games and PC games. Technically those are two remedies (one for PC, one for console games), but this is totally consistent with what Microsoft offered to the UK CMA.
Previously, regulators in seven other jurisdictions cleared the transaction unconditionally (in chronological order: Saudia Arabia, Brazil, Serbia, Chile, Japan, South Africa, Ukraine). In late April, an outlier agency--the UK Competition & Markets Authority (CMA)--issued a prohibition decision that goes against the law, the facts, and common sense. Also, the U.S. Federal Trade Commission (FTC) filed a meritless lawsuit in December, but it can't prevent the consummation of the deal without a court order that it realistically won't be able to obtain.
Let's look at the EU ruling first and then discuss what this outcome means in the multijurisdictional scheme of things, particularly with a view to the UK. From here on out, there are various paths to the closing of the deal. If you wish, you can go directly to that part.
EU Commission decision: clearance based on commitments that benefit consumers
The EC's Directorate-General for Competition (DG COMP) conducted a very thorough investigation of the biggest tech acquisition in history. Today's decision is prudent, not paranoid:
After looking at the potential effects of the acquisition on certain markets, the Commission determined that consumers would lose significant benefits if the deal was blocked. In the Commission's assessment, any potential concerns by Microsoft's competitors are more than satisfactorily addressed by Microsoft's commitments, which the EU's competition regulator therefore accepted. That's pragmatic.
In my personal opinion, the seven antitrust authorities that cleared the transaction without requiring any commitments simply got it right. There just is no credible theory of harm here. The games market is and remains highly fragmented. In consoles, Sony is the undisputed market leader and its PlayStation console has several times more exclusive titles than Microsoft's Xbox. Cloud gaming is a means of playing games, and if one wanted to deem it a market, it would at best be a nascent market, a niche for the foreseeable future, and highly dynamic with major new entrants all the time.
But in merger reviews, regulators have one major leverage: time. Even if a blocking decision could be reversed, the closing deadlines typically found in merger agreements cannot be met if additional time is required for an appeal (short of an agreement on an extension).
The commitments that the Commission extracted from Microsoft don't appear onerous. Given that all companies prefer to retain a maximum degree of flexibility, it would be an overstatement to say that DG COMP walked through an open door. That said, those commitments are consistent with Microsoft's public statements about its post-merger intention of bringing more games to more gamers (as opposed to withdrawing games from platforms or withholding them from cloud-gaming services).
What does this mean in the multijurisdictional scheme of things? And particularly for the CMA?
It's hard to overstate the significance of the EU decision. The European Union with its roughly 450 million inhabitants is the third-largest economy in the world (after the U.S. and China), representing approximately one sixth of the global economy. It's about five times as large as the UK economy.
The UK CMA has been investigating such "Texas-size" mergers only for a couple of years (prior to Brexit, the big cases were all handeld in Brussels) while the Commission has been doing so for decades. Another important difference is that DG COMP has multiple industry-focused merger units (org chart (PDF)), one of which (COMP.C.5) focuses on IT, communication, and media industry mergers, while the members of the CMA's Microsoft-ABK inquiry group have zero tech industry background (if anything, they're experts in the financial services industry) and investigate mergers in a wide range of industries.
Experience and expertise clearly make the EU decision a more likely "lodestar" for regulators in other jurisdictions than the one taken by the CMA. The decisions also speak for themselves. The EU ruling reflects pragmatism, a consumer focus, and an open mind. The CMA decision is flawed in law and evidence, biased, arrives at a totally implausible market share for Microsoft in cloud gaming of 70% (even the extremely aggressive class-action lawyers suing Microsoft in San Francisco over this deal did not dare, for fear of sanctions, to claim more than a 40% share). The only beneficiaries of the CMA's unreasonableness are competitors (specifically, complainants Sony and Google) seeking to be shielded from competition.
The European Commission asserts its thought leadership among the world's top three competition watchdogs with today's decision. While the FTC rushed to court in December (hoping to dissuade the EC from working out an agreement with Microsoft) and the CMA issued a blocking decision that won't stand (despite the highly deferential standard of review in the UK), DG COMP has focused on what's the best outcome for competition and innovation. It has demonstrated that if a forceful but constructive regulator negotiates with a constructive acquirer, solutions can be found. The FTC and the CMA try to be part of the problem while the EC strives to be part of the solution.
The Commission is being diplomatic about the EU-UK divergence.
In the build-up to this decision, Mrs. Vestager mentioned at least twice that different jurisdictions could arrive at different conclusions, and she hinted at market-specific differences as a potential reason. But that's just because competition authorities rarely criticize each other's decisions in public. The argument that FIFA Soccer is a particularly popular game in Europe applies to the UK as well.
The net effect is that the CMA looks bad. Extremely bad.
The CMA decision has been--and continues to be--criticized.
There will be even more criticism now that the EU Commission has determined that Microsoft's free-streaming remedy offer is a good one that benefits consumers and protects competition. By contrast, the CMA just wanted to block no matter what and was more focused on competitors with their partly ridiculous claims than on the competitive process (which would actually be its job).
The CMA said it wanted to protect competition in the cloud-gaming market, but companies competing with Microsoft's xCloud in that field would actually like the merger to happen. Nvidia, which is the cloud-gaming market leader with its GeForce NOW service, said after the CMA decision that "cloud gaming providers stand to gain an even deeper catalog of games if Microsoft’s acquisition of Activision is completed." Boosteroid, a European cloud-gaming company, disagrees with the CMA's underlying assumption that Activision Blizzard would make its games widely available on cloud serivces anytime soon and says the CMA is actually slowing innovation.
In a Twitter poll asking gamers who they thought was in the best position to make a legally, economically, and technically accurate decision on this merger, EVP Vestager received 6.5 times as many votes as the CMA's CEO and 7 times as many as the FTC's chair.
I've even lost track of the numerous commentaries in U.S. and UK publications. One article I would like to point to here was written by lawyers from McDermott Will & Emery, a major law firm that is not involved with the case. According to that commentary, the CMA ruling only looks like a traditional foreclosure theory of harm, but in reality it is "the expression of more novel and overall, rather vague concerns over the strengthening of a digital ecosystem" and, above all, "reveals a worrisome stance on behavioral remedies, which have traditionally played an important role in removing vertical concerns."
The real players do not see themselves protected by the CMA decision. The CMA ruling adversely impacts them, resulting in less competition and less consumer choice.
The CMA's approach is met with growing skepticism in the UK.
Reasonable competition enforcement can strengthen an economy. Regulatory excess does the opposite. For instance, for venture investments the most common exit strategy is to sell companies, and the acquirers are often sizable tech companies. Even if they operate internationally, startups tend to have a higher market share in their domestic market, and if you then have a regulator that makes unpredictable and irrational blocking decisions, it's bad for business. Venture investment in London-based companies fell more sharply in the first quarter of this year than in comparable economies:
In the first three months of this year, VC investment in London 🇬🇧 fell 79% to $2.1 billion, according to Dealroom.
— WolfOfDarkness® (@WolfOfDarknesss) April 30, 2023
Soon UK will be officially closed for business, Thanks to #CMA .#UnblockABK @FOSSpatents #Microsoft #ActivisionBlizzard pic.twitter.com/7FdjGt0fxD
Public complaints over the CMA's occasional regulatory overreach were voiced by companies like Motorola Solutions and Deliveroo even before the Microsoft-Activision decision. On Friday, the UK's Prime Minister mentioned the CMA in the wider context of the need for "a regulatory system in the UK that doesn’t get in the way" as British businesses seek to thrive. PM Rishi Sunak said so on LinkedIn, a platform acquired by Microsoft and an example of "Big Tech acquisitions" not necessarily being bad for users.
The "draft strategic steer to the Competition and Markets Authority, 2023" obviously does not allude to particular cases, but the government wouldn't have written it up in the first place if the CMA's leadership had always set the right priorities for Britain's economy. The Sunak Administration wants the CMA to "prioritise outcomes that promote competition, investment, innovation and boost economic growth." Enforcement should focus on markets where there isn't enough competition (obviously a non-issue in gaming) and on "action that addresses cost of living challenges."
Tomorrow (Tuesday) morning, CMA chair Marcus Bokkerink and CEO Sarah Cardell will have to testify before the Business and Trade Committee of the UK Parliament on the CMA's work. I will watch the public part of the meeting and comment on it. Oversight is important, especially when an agency makes aggressive decisions that look like it's out of control. It will be interesting to see how the CMA seeks to justify its outlier decision in the Microsoft-ABK case if questions are asked about that one. It's hard to imagine that the CMA's most controversial decision at the moment would not come up during that hearing.
If that case is indeed mentioned, the CMA can only hope that no one will demand justifications for the unbelievable mistake the agency made in the provisional findings (subtracting only one year of costs from five years of benefits, a mistake the CMA then had to correct by amending its provisional findings). That was an embarrassment not only for the CMA but for the entire UK government: in one of its most important documents ever, a key government agency made a mistake that many eighth-graders would be ashamed of. And after they recognized it, all they did was to import their previously failed theories of harm (a conglomerate/ecosystem theory and a "console gaming services" theory) into the cloud-gaming theory: the epitome of unfairness and irrationality.
It shouldn't take long before the Competition Appeal Tribunal (CATribunal or just CAT) will publish a summary of Microsoft's and Activision Blizzard's appeals.
Microsoft's lead counsel on appeal will be Daniel Beard KC, who has previously defeated the CMA in court, such as in the landmark "Compare the Market" case, where the CMA lost on all grounds but one.
Activision has retained Lord David Pannick KC, a lawyer who represented Queen Elizabeth II and former Prime Minister Boris Johnson ("partygate" scandal). And as The Lawyer reports, Lord Pannick will be supported by Slaughter & May, the firm of which CMA CEO Sarah Cardell used to be a partner.
I see a very high probability of the CMA decision being quashed on irrationality grounds. It is an irrational decision not only in terms of that being the legal standard for the non-procedural parts of CMA appeals but even in a literal sense. Statistically, the CMA wins 67% of all merger appeals, which means that it does not win the other 33%. Neither is this the average case nor are average lawyers at work. Many merger decisions don't get appealed, or the appeals at least don't reach the decision stage. Regulatory resistance often results in parties changing plans. Here, however, both parties have made unequivocal statements and their actions (the lawyers they've hired) speak louder than words. If they have to extend the merger agreement, they will presumably do so.
There are huge issues with the CMA decisions, and the lawyers representing the appellants are the best in the entire United Kingdom. The CAT will probably overrule the CMA on multiple substantive grounds, in which case it won't even be able to rebuild its (only) theory of harm, given that the CMA cannot ignore the CAT ruling on remand but must heed it. When there are purely procedural decisions, the CMA can arrive at the same result; not so when the issues are substantive and serious.
If the CMA were to act unreasonably on remand, the government could easily overrule it without having to fear the slightest backlash. The CMA is just a government agency. It is not as independent as a court of law.
The EU decision--and the long list of jurisdictions that cleared the merger even unconditionally--won't be precedential for the CAT, but psychologically and politically, it hurts the CMA to be an extremist outlier that claimed to protect competition in cloud gaming but Microsoft's competitors in that field want the CMA decision overturned and the transaction to be consummated.
There are many things that could happen, and many permutations of different scenarios in different jurisdictions, but an isolated CMA is not going to prevent the transaction from consummating. If the CMA had approved the transaction, then after today's EU decision we'd probably have been at a point now where the FTC would have had to seek a preliminary injunction from a federal district court. As Microsoft's U.S. lead counsel acknowledged at a Friday hearing in a class-action-style private litigation, "at this point it would be very difficult to close." She explained to the federal judge that the priority was to get an appellate hearing date. But as jurisdiction after jurisdiction clears the transaction, it's getting lonely around the CMA and its only ally (the FTC).
The CMA can join the competition enforcement mainstream. It can look for an exit strategy. In the alternative, the agency would effectively be working against the Prime Minister's agenda--and the primary beneficiary if companies are scared out of investing in the UK will be the EU. UK politicians are not going to let the CMA's leadership do (more) damage to the country.
