“The deal that will change the industry forever.”

That’s how analysts described Microsoft’s proposed $68.7 billion acquisition of Activision Blizzard to GamesIndustry.biz shortly after it was announced last year.

16 months later, and in the wake of the UK’s Competition and Markets Authority announcing that it was preventing the deal from happening, that change seems far from certain.

With the future of this merger up in the air, we reached back out to those same analysts to tackle the biggest questions around this latest hurdle for Microsoft and Activision Blizzard.

Was the CMA’s decision expected?
Why was cloud gaming the biggest hurdle?
Will Microsoft’s appeal be successful?
What happens to Microsoft if the deal does not go through?
What happens to Activision Blizzard?
What impact does this have on future M&A in games?
Is the deal dead?

Was the CMA’s decision expected?

Reactions to the CMA’s decision are mixed. While Niko Partners’ president and CEO Lisa Cosmas Hanson believes it to be fully in line with what the UK regulator has been saying throughout the process, Kantan Games’ Dr. Serkan Toto describes it as “quite shocking” since the consensus among games industry professionals was that the UK would eventually approve the deal.

Nick Parker of Parker Consulting agrees, adding: “I was surprised at the CMAs decision and would rather the UK had been a follower on this rather than the leader if Europe had been the bearer of bad news first.”

However, Ampere Analysis’ Piers Harding-Rolls argues that whether or not this is a reasonable decision depends on whether you believe streaming will become the standard form of games distribution within the next five to ten years. The analyst’s own opinion is that it will take at least that long for cloud gaming to become “more than a footnote across the games sector.”

“The games market is so dynamic it’s hard to predict a long-term outlook in terms of changes in distribution,” he adds. “Usage is growing though, partly driven by Microsoft’s investment in Game Pass Ultimate, infrastructure and service delivery, and Microsoft itself has been talking up its ability to reach billions of gamers using streaming distribution, so it’s somewhat understandable that the CMA would be focused in on this area of the market.”

Finally, Midia Research’s Karol Severin adds that this approach “does not really protect gamers.” The CMA suggests that, if not owned by Microsoft, Activision Blizzard could start its own cloud gaming service and therefore provide more choice to conusmers – but Severin disagrees that this is a good thing.

“More choice isn’t always automatically better for consumers,” he explains. “People often think of choice as linear – the more, the better – but it’s actually a bell curve. Too little choice is not good, too much choice is not good either, but there is an optimal amount of choice somewhere in the middle – after which the benefits start to decline due to fragmentation, price, tyranny of choice.”

He continues: “From the beginning of the process, I’ve been fairly vocal about not seeing any substantial reasons for the deal not to go through. The reasons listed by the CMA yesterday haven’t convinced me otherwise. In fact, some of these reasons raised more questions than answers for me. For example, how big does a market have to be to be scrutinized by regulators?”

Why was cloud gaming the biggest hurdle?

With Microsoft, Activision Blizzard and Sony making so much noise about how this acquisition would affect Call of Duty and its availability, the concerns around cloud gaming were drowned out – yet ultimately this proved to be the deal’s downfall (so far).

The CMA estimates that the cloud gaming market could reach $11 billion by 2026, but Severin argues that even if this were the case, it would equate to less than 5% of the overall games industry.

“CMA makes a point of Microsoft having large market share in the nascent cloud gaming market – well, if you are one of the pioneers and early movers in a market that you helped kickstart (and doing things right for consumers), then naturally you are going to have a high market share while the market is small,” he adds.

“In a way, it risks punishing innovators for successfully moving into new markets and doing too well too soon. Microsoft in this sense is a victim of its own success.”

Omdia’s James McWhirter adds that the analysis firm’s own estimates put cloud gaming revenue (encompassing Xbox Cloud Gaming and PlayStation Plus Premium) at $5.1 billion in 2022 – compared to $35 billion in conventional console game sales. In this regard, he says, the CMA is clearly taking a forward-looking view on the matter, and one that may have some substance to it.

“While cloud gaming does not provide a good enough experience today, when you take into consideration the direction that technology is moving in, streaming is likely to become the primary means of accessing premium gaming for a non-trivial portion of the addressable market,” he says. “This is particularly pertinent in markets such as India and Brazil, where traditional premium gaming on PC and console has not landed in the same way as other territories.

“With streaming taking the idea of hardware ownership out of the equation, content will become an increasingly important differentiator for cloud services’ competitiveness. In this context, offering a portfolio of key ABK titles such as Call of Duty and World of Warcraft would act in Microsoft’s favour in a meaningful way that few cloud gaming operators could match.”

Microsoft proposed several remedies to the CMA, including the fact that it had signed ten-year deals to bring its games (and those of Activision Blizzard, if the deal is approved) to other cloud gaming services such as Nvidia GeForce, Boosteroid and Ubitus.

McWhirter observes that these partnership do not necessarily mean rival services will get unrestricted access to those games. There will be licensing terms, fees and conditions that still benefit Microsoft, and the platform holder also owns the Azure infrastructure that not only powers Xbox Cloud Gaming but other cloud services as well.

Harding-Rolls adds that services such as GeForce Now and Boosteroid are “bring-your-own-game services, which don’t compete with a multi-game subscription offer like Game Pass.”

In a report published this morning, DFC Intelligence cites the CMA’s reasons for rejecting Microsoft’s proposed remedy, including the fact that these partnerships did not cover other multi-game subscriptions, that it was not open to cloud gaming providers who wish to offer games on non-Windows operating systems, and such deals would standardise the terms and conditions with which games would be made available (as opposed to there being room for variation and creativity, as there is without the merger).

“In other words, Microsoft needs to propose remedies that address those arguments,” the DFC report reads. “The strategy for acquiring Activision Blizzard is Microsoft can use games as a ‘Trojan horse’ to bring consumers into other Microsoft products and services, most notably on PC and mobile, not console.

“A remedy acceptable to the CMA would probably limit Microsoft’s ability to use Game Pass as an entry to other services. There will be some point where Microsoft will walk away versus compromising.”

DFC also quotes the CMA suggestion that Microsoft’s remedy would “inevitably require some degree of regulatory oversight” by the UK regulator, with the analysis firm adding that this is clearly “not a hassle they want to deal with.”

“It is easier to block the merger,” the report continues. “This implies that somehow Microsoft needs to find a remedy that does not require ongoing oversight. This may be impossible.”

Will Microsoft’s appeal be successful?

Given the effort and cash already spent campaigning for this acquisition, it’s unsurprising that Microsoft has vowed to appeal against the CMA’s decision. However, few analysts believe the Xbox firm will prevail.

“Both parties in the potential deal sound confident about their chances, but they were also confident before the decision of the CMA hit them,” observes Toto.

Harding-Rolls offers more detail on the appeal process: For Microsoft to be successful, the UK’s Competition Appeal Tribunal will need to find a procedural error in the CMA’s review process or prove that the CMA acted ‘irrationally’. It may also require a lengthy review of the CMA’s findings.

“It is unlikely that the CAT will disagree with the CMA on all counts, but it may see things differently on certain points,” Harding-Rolls reasons. “I think the chances of a successful appeal based on a rejection of the CMA’s findings is relatively low looking at the history of these sorts of appeals. Having said that, the CMA’s more activist stance will inevitably see more decisions being appealed and we may start to get a higher volume of successful outcomes as a result. I’m expecting this process to take months.”

Niko’s Hanson adds: “It is unlikely that the appeal would lead to a reversal of decision due to the depth of review that has already taken place, and that CMA has stated that the behavioral remedy was insufficient. Microsoft’s offer to make Activision IP available on Nintendo and Steam, for example, was insufficient in the eyes of the CMA.”

What happens to Microsoft if the deal does not go through?

Despite the magnitude of this deal, Midia’s Severin emphasises that neither Microsoft nor Xbox will “live or die by this acquisition.”

“Activision is of course the desired target, but there are other places Microsoft can take its multi-billion war chest to,” he says. “If this doesn’t go through, I’d expect for Microsoft to continue on its acquisition journey with other targets.”

Toto agrees, suggesting Microsoft could take a similar approach to the likes of Tencent or Saudi Arabia’s Public Investment Fund.

“Microsoft will absolutely need to start looking at other possible acquisitions now,” he says. “They are clearly behind Sony in terms of first-party games. If the deal doesn’t happen, Microsoft will probably need to gobble up multiple studios to strengthen their software portfolio – and they still won’t get something as big as Call Of Duty.”

Parker adds: “If the deal doesn’t go through, and I’m not sure it can now, Microsoft will have lost out more than ABK in terms of market presence opportunities and will have to go searching for another target to fill its gaps in cross platform exploitation and user base proliferation.”

Harding-Rolls concurs, stressing that while the collapse of this deal would be a blow, it’s unlikely to lead to a “wholesale review of Microsoft’s games strategy.” Hanson, meanwhile, adds that the need for acquisitions will also be fuelled by Xbox Game Pass, adding: “Microsoft has a challenge in keeping [its subscription] appealing and valuable to current and future users, as the service requires continuous release of new content in order to retain and attract users.”

What happens to Activision Blizzard?

Analysts agree the impact on Activision Blizzard will be minimal, although its share price will inevitably take a hit. Prior to Microsoft’s proposed acquisition, Activision Blizzard was one of the most lucrative publishers in the games space, thanks not only to Call of Duty but also its ownership of Candy Crush creator King. That does not change with Microsoft out of the equation – in fact, just yesterday the company announced it enjoyed one of its best financial quarters to date.

Harding-Rolls says nothing will change for Activision Blizzard in the short or even medium term, but its long-term future may need to be reviewed: “A deal with Microsoft would have helped insulate Activision’s business against future challenges from changes in distribution, and from the impact of new business models such as subscription, and escalating development costs. Without Microsoft’s capabilities and financial strength, Activision will have to reassess its longer-term growth and product strategies.”

Toto sees this as “back to square one” for Activision, adding: “Is there another buyer out there willing to pay $69 billion for Activision? Probably not in the foreseeable future. I think in the grand scheme of things, the deal possibly falling through is worse for Microsoft than Activision.”

What impact does this have on future M&A in games?

With the biggest M&A deal in the industry’s history potentially scuppered, it’s hard not to imagine other giants considering similar purchases from being discouraged by the prospect of trying to get their acquisitions through regulators’ complex processes.

However, Niko’s Hanson says the Microsoft-Activision deal “does not reflect the broader landscape of possible acquisitions of AAA game developers” – if only because of its sheer size.

She continues: “As with any growth sector, game developers, publishers, platforms and other parts of the video game ecosystem will continue to experience consolidation for economic efficiency and to improve services to gamers who are more and more discerning, not just in western markets, but worldwide in all established and emerging video game markets.”

Parker agrees: “Each acquisition of this size is taken on a case by case basis by authorities so I’m not sure it will prevent or discourage future M&A opportunities.”

Going further, Severin believes that the days of independent AAA publishers like Activision Blizzard may be limited, and that similar proposed acquisitions could be necessary in future.

“I don’t see pure-play games companies being too successful on their own without being able to create commercial synergies beyond gaming,” he explains. “Microsoft, Nvidia, Amazon and Google can all afford to finance user and platform growth, as they will be drawing wider benefits in the mid-long term. But a pure games company is vitally dependent on making games profitable – so competing in terms of value offerings will be hard.”

However, Ben Greenstone, managing director of tech policy and communications consultancy Taso Advisory, laments the impact this will have on the regulator’s home market.

“The CMA’s decision could act as a massive disincentive for video game businesses operating in the UK,” he says. “It narrows the exit route for companies, potentially damaging investment into the sector and discouraging businesses from starting up in the country. The CMA should absolutely enforce, but this looks misguided.”

Is the deal dead?

The $69 billion question is: is this the end of the road for Microsoft’s purchase of Activision Blizzard?

The fact the Xbox firm is appealing is an immediate no, albeit with the caveat that – as mentioned – the appeal is unlikely to be successful, and the DFC Intelligence report is very clear on this matter.

“The deal is not dead,” the company wrote. “However, Microsoft will likely need to make further compromises to appease regulators. The question is how far is Microsoft willing to compromise to get the deal approved? DFC now believes that the CMA may require Microsoft to offer more than it is willing to give. There is a growing danger that Microsoft will walk away from the purchase.”

Midia Research’s Severin remains optimistic: “I still believe the deal will eventually go through, given how soft the currently listed reasons feel. A cynic could think that the decision is an attempt at getting round two of concessions from Microsoft.

“Microsoft has already gone the extra mile in way of assurances – for example, the ten-year Call of Duty non-exclusivity offer, or partnership with NVIDIA and so on – so who is to suggest it’s not willing to give up a little bit more to get the deal over the line?”