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Microsoft in Brussels: Sound and fury, signifying nothing | Opinion

Whatever you think about Microsoft’s arguments for letting its acquisition of Activision Blizzard advance, you can’t fault its stage management. This week was crucial to the case it is making to the European Commission, which is one of the major remaining regulatory hurdles to the deal proceeding, and Microsoft orchestrated an impressive PR blitz for the occasion, most of it designed to underline a commitment to multi-platform releases.

Ten-year commitments to launch Call of Duty titles on Valve’s Steam and on Nintendo platforms were re-emphasised, and Microsoft president Brad Smith waved around an envelope containing, he claimed, a deal ready for Sony’s signature, which would presumably grant them the same thing.

There was a highly unusual intervention from the Communication Workers of America union – it seemed to imply a hostage situation, with Activision Blizzard being such a hellishly awful place for workers that regulators should let the deal proceed just because Microsoft is a better employer, leading one to wonder if anyone at Activision Blizzard signed off on this particular part of the strategy.

Perhaps the most impactful aspect of the whole circus that swept through Brussels, though, was that Microsoft entered the week with three major industry peers opposing the deal, but left with only two. Sony and Google are still against the deal going through, but a carefully timed announcement of a deal between Microsoft and Nvidia has cleared up opposition from the giant chip-maker. This is likely to be the most impactful of all the week’s shenanigans for a couple of reasons.

First, it’s a volte-face for a high-profile opponent, suggesting to regulators that Microsoft’s own negotiations over concessions are providing effective solutions. Secondly and perhaps more importantly, the agreement to put Xbox titles on the GeForce Now cloud gaming platform looks, when viewed from certain angles and in certain lighting conditions, like a concession on by far the thorniest aspect of this deal, namely the rapidly growing market of game subscription services.

It remains to be seen whether all of this will actually convince the European Commission, which has tended to view the antics of American tech companies with a jaundiced eye, but in PR terms at the very least, it has been a coup.

Microsoft has scored a lot of very positive headlines across the political and technology press – outlets that many regulators are likely to be reading as they consider the impact of the deal – for a concession that looks enormous at first glance, but is actually damn near meaningless in the long term, and would take away none of the enormous competitive advantage the company hopes to gain from this acquisition.

Bear in mind that back when Nvidia first introduced GeForce Now to the world, the idea was that publishers would have to explicitly opt-out from their games being on the service – because GeForce Now is not a game subscription service, or in any way a competitor to Microsoft’s Game Pass, but is rather a way to rent a powerful gaming PC in the cloud and use it to play software you personally own by installing it from digital distribution storefronts.

Several publishers pitched a fit about this (largely because it threatened to disrupt their own notions of turning their games into streaming products) and arguments were made that GeForce Now was in breach of various contracts and terms of service. Nothing ever went to court – I’ve heard convincing arguments that many territories, including the EU, would probably have upheld consumers’ rights to use their purchased software on remote and local systems as they please in any such legal battle.

Pissing off every game publisher on the planet wasn’t the business move Nvidia had in mind, though, so they switched over to a model where publishers explicitly opt-in to having their games on GeForce Now. Activision Blizzard was notably one of the publishers that forced this change, and it promptly pulled its games from the service; now Microsoft-owned Bethesda’s games were also pulled in early 2020.

What Microsoft has conceded to Nvidia, then, is really just a restoration of the former status quo. It’s great for GeForce Now, for sure, but it’s really no skin off Microsoft’s nose either, since this remains just a different way for people to play games they have purchased from Microsoft.

Crucially, it is not a concession that in any way assuages concerns about Game Pass’ potential dominance of the game subscription market. GeForce Now doesn’t offer games as a subscription, it’s just a platform for playing purchased software on. It’s being described in some quarters as a competitor to Microsoft’s Xbox Cloud Gaming, which is a better spin from Microsoft’s perspective, but Xbox Cloud Gaming is really just a feature of Microsoft’s other services, not a distinct service offering in its own right – and the most legitimate concerns about the competitive impacts of this deal are about game subscription services, not about the minutiae of where the GPU running your game is physically located.

This is the side of the argument that Microsoft is desperately trying to distract everyone from – and that may well be a winning strategy. There’s no arguing with the company’s claims that Sony has been a dominant force in console gaming in recent decades – that claim holds water even if the numbers they used to back up that claim this week conveniently ignored the existence of Nintendo, PCs, and every other gaming platform in existence.

Even in the Xbox 360/PS3 generation, Sony’s console ultimately took the lead in installed base and revenues despite a very rocky start, while every other PlayStation generation has been enormously dominant in terms of both software and hardware sales. Microsoft’s argument that Sony is just trying to protect that dominance is convincing, largely because it’s quite obviously true.

Sony would very much like to remain on top of the competition, and fighting tooth and nail against the Activision Blizzard acquisition is one of its best cards to play in the face of Microsoft finally doing what everyone expected and feared back in the early 2000s, namely throwing its gigantic wallet at the problem of how to establish dominance in the games market.

If we narrow the argument to the terms which Microsoft is arguing, it’s certainly in the right – Sony is the dominant force in the market and it’s not in the interests of consumers for regulators to defend companies that dominate their markets. This is complicated massively by broadening our perspective a little to consider the relative sizes of the companies – Sony’s entire market cap is just north of $100 billion, so not that much larger than the money Microsoft will have spent buying game publishers and developers by the time this deal closes, which means that this acquisition spree really is bringing a rocket launcher to a knife fight, in financial terms.

The bigger problem, however, is still Game Pass – and the reality that Microsoft is studiously avoiding throughout this entire process is that it barely matters if Call of Duty and other major Activision titles are released on PlayStation, and Nintendo consoles, and GeForce Now, if those titles are full-price on those platforms but available for free on Game Pass, with zero chance of them ever appearing on any other subscription service.

“Everyone else’s users will pay $80 for these, our users will get them for free” is a much less convincing pitch for multi-platform parity than the one Microsoft is making this week, but it’s far closer to the truth – and why wouldn’t it be? Does anyone really expect that Microsoft is forking out $70 billion – the most it has ever paid for any acquisition, in any market sector – just to pursue a rose-tinted vision of platform-agnostic game software?

It’s paying that money for an enormous competitive advantage in what it believes will be the dominant business paradigm for the entire games industry in years to come – game subscriptions – and the concessions it has made in putting paid-for versions of some of Activision Blizzard’s games on Nintendo and Nvidia platforms do not even touch upon that core objective, or on the core concerns held by Sony and by at least some of the regulators examining the deal.

Nonetheless, Microsoft’s strategy here looks very effective. It started the week with three major industry peers publicly opposing the deal, and now it’s down to two. It’s signed deals with Nintendo, Valve, and Nvidia (none of which appear to have any current designs on the subscription side of the market, with the arguable exception of Nintendo’s very boutique offering of retro titles on Switch), and in the process it has made Sony look increasingly intransigent to the public and, most likely, to some of the regulators.

Remarkably, it has achieved this at zero cost to itself, undermining none of the value it was seeking from the deal. The deal it has offered Sony, which Brad Smith claims is signature-ready and only being held back by Sony’s stubbornness, is probably a mirror of the Nintendo deal and would similarly have effectively zero impact on the company’s objectives for the acquisition.

If regulators accept these deals as being sufficient concessions – and if I were to place bets, that’s where I’d put my money right now – then Microsoft’s negotiators will have pulled off a real coup, using some smart distraction tactics to secure approval for a controversial deal without actually addressing any of the reasons for that controversy.

As I wrote last week, I’m not sure that’s a great outcome for the industry at large. A lot of people are currently getting dollar signs in their eyes from seeing Microsoft splash its cash around on such a scale, and that might be making it hard to see the potential dangers of a future where Game Pass becomes simply too established for any challenger to get a toe-hold, leaving publishers with no choice but to accept Microsoft’s terms if they want to have access to any kind of sizeable audience.

I’m clearly not alone in that assessment; the UK’s CMA gathered responses from six of Activision Blizzard’s peers (presumably meaning third party publishers, so not including Sony or Google) and found that half of them expressed serious concerns about the competitive impact of this deal going through.

Even if Brussels gives the deal a seal of approval after this week, the CMA remains a major hurdle, especially given that it explicitly identified game subscriptions as a competitive sector it was concerned about separately from the console market. As Chris Dring points out, Activision Blizzard’s astonishingly clumsy and tone-deaf posturing is probably actually making things even tougher for them with the UK regulator, and contrasts shockingly badly with Brad Smith’s smooth and carefully managed pitch to the EU’s regulators this week.

Microsoft’s core argument is solid – it is right to point out that Sony’s current position is a dominant one, and it’s smart to argue that this means the company should not be protected by regulatory oversight – but everything now hinges on whether regulators notice how narrow the scope of that argument actually is, focusing exclusively on competition in one business sector (console hardware and software sales) which Microsoft’s own much-trumpeted vision for the future of gaming sees as rapidly becoming obsolete in the face of platform-agnostic game subscription services.

The question of just how wide Game Pass’ moat will become when it is the only subscription service that can provide Activision Blizzard games (as well as Microsoft games and Bethesda games, of course) is still a serious concern – but regulators have a tendency to apply rules for yesterday’s markets, not tomorrow’s. Microsoft may well have done just enough to convince the EU, its former regulatory bête noire, that this time out it really is the plucky underdog – and not, in fact, a trillion dollar company asking for permission to use its financial muscle to dig an enormous moat around a business that’s designed to obliterate a competitor an order of magnitude smaller.

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