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Microsoft’s acquisition of Activision Blizzard: The road to approval

Microsoft’s proposed $70 billion acquisition of Activision Blizzard was being scrutinised by regulators around the world.

The regulation process was complicated, and involved various different bodies from different countries that had to look at the deal before it could go ahead.

Below is a breakdown of the various regulatory hurdles Microsoft and Activision Blizzard faced, originally published in the summer of 2022 and frequently updated as the story developed. It is preserved to reflect the situation on October 12, 2023.

On October 13, 2023, the UK’s Competition and Markets Authority approved the transaction, meaning that Microsoft’s acquisition of Activision Blizzard can proceed.

I’m having trouble keeping up. What’s the latest?
Why does Microsoft need approval to buy Activision Blizzard?
Who are the regulators?
What ‘phases’ did the regulators have to go through?
The UK blocked the deal. That means it’s over, right?
The EU has approved the deal, so why do Microsoft and Activision need US or UK approval?
Can the FTC’s legal complaint block the deal?
What are regulators concerned about specifically?
What has Microsoft said to address these concerns?
Why is it a problem if Microsoft becomes dominant in games?
Is Call of Duty likely to make Microsoft dominant in games?
So is it all about the games console space?
If Disney can buy Star Wars, Marvel and Fox, surely Xbox can buy Call of Duty?
Could Microsoft just give up on the acquisition?

I’m having trouble keeping up. What’s the latest?

On July 19, 2023, Microsoft and Activision Blizzard announced they had extended the deadline for the acquisition to October 18. The transaction was originally due to be completed by July 18, but the two companies have negotiated a little breathing room as they clear the final regulatory hurdles.

If it is not completed by October 18, and a another deadline extension is not agreed, Microsoft must pay Activision Blizzard $4.5 billion (or $3.5 billion if the deal is terminated between August 29 and September 15).

The deal cannot go through without approval in the EU, UK and US. Here’s what’s happening in each of those markets:

United Kingdom

The CMA has preliminary approved the deal following the Microsoft’s proposal to sell the cloud gaming rights for all current Activision Blizzard title to Ubisoft, which is says will address most of its concerns about competition in the space.
The regulator is now in consultation over the “limited residual concerns” that remain, for which Microsoft has proposed further remedies, and is expected to make a final decision around October 6, 2023.
The CMA block the original deal, and has been treating the modified transaction as a separate proposition.

United States

The FTC withdrew its administrative challenge against the deal, after a request from Microsoft and Activision Blizzard.
The request followed a week-long court hearing where the Federal Trade Commission was denied a block against Microsoft and Activision from completing the deal before an administrative hearing in August, scheduled after the legal challenge it issued in December 2022.
The FTC appealed against this decision. This was also denied.
In preparation for the acquisition, Activision Blizzard has been removed from four of Nasdaq’s indices.

European Union

The European Commission approved the deal on May 15, 2023

Here’s the latest developments outside the three key markets:

Microsoft and Sony signed a “binding agreement” that will keep Call of Duty on PlayStation platforms for ten years after the acquisition goes through.
We spoke to analysts about the final barriers that remain and whether the deal is likely to be completed by July 18.

Over 40 other countries also approved the deal, including:

European Union
Saudi Arabia
South Africa
South Korea
New Zealand

Why does Microsoft need approval to buy Activision Blizzard?

This deal is – to use a professional business term – massive. It’s a potentially game-changing deal that could not just transform things for Microsoft and Xbox, but the entire games industry. It has the potential to impact everyone, from the smallest indie developer to the biggest names in the business, and, of course, consumers.

Regulatory bodies exist to try and make sure such deals don’t result in any antitrust issues, where one company can become overly dominant, or competition is harmed in such a way that it could lead to fewer choices, higher prices and/or less innovation.

Considering the scale and size of the deal, Microsoft would have to obtain antitrust approval before taking ownership of Activision Blizzard.

Who are the regulators?

There are regulatory bodies all over the world, but there are three main ones that Microsoft will want approval from to complete the buy-out. The first is the US regulator the Federal Trade Commission (FTC). This review went through two phases of in-depth investigation, before the FTC issued a lawsuit on December 8, 2022 in an attempt to block the deal.

The next regulator who is currently looking at this is the UK’s Competition and Markets Authority (CMA). Phase one of its investigation began in July 2022, and on September 1 it recommended that it move into a second phase, with Microsoft and Activision given one week to provide evidence convincing the regulator that this deal will not cause a “substantial lessening of competition.”

The CMA announced it’s blocking Microsoft’s proposed acquisition of Activision Blizzard on April 26, 2023 “over concerns the deal would alter the future of the fast-growing cloud gaming market.” Microsoft said it’d appeal.

The third main regulator for Microsoft to overcome is the European Commission. Antitrust regulators first surveyed developers about their concerns over the deal, and on November 8 the Commission opened its own in-depth investigation into Microsoft’s proposed acquisition. On May 15, the EC announced it had approved the deal.

Other regulators around the world are also looking into the deal, with the relevant bodies in Chile, Brazil and Saudi Arabia already giving their approval, but the three above carry the most weight.

Interestingly, the Brazilian regulator (CADE) has a policy of publicly publishing the responses it has received from the games industry about the deal and its potential impact. This generated plenty of headlines in August 2022 as it revealed various parties’ concerns, including Sony’s warning that Call of Duty becoming exclusive to Xbox could influence which consoles people buy.

What ‘phases’ did the regulators go through?

Whenever regulators need to approve a merger or acquisition, the first phase is a relatively short period where the regulators will request information and send questionnaires to competitors. Most M&A deals are approved during this phase.

For anything more complex where there’s a risk to competition, the regulators will request a second phase. This is where a more in-depth analysis of the merger’s effects on the market will be analysed. This is typically a far more detailed research phase designed to make sure the transaction doesn’t restrict competition in the regulators’ markets.

The UK has blocked the deal. That means it’s over, right?

The Competition and Markets Authority, the UK regulator handling the deal, announced on April 26, 2023 it would not approve the acquisition to go ahead.

The primary reason was concerns over Microsoft dominating the cloud gaming market and therefore undermining innovation in this space. Despite the number of deals Microsoft has done with cloud service providers to bring its games (including those of Activision Blizzard, if the acquisition is approved), the CMA remains convinced there would be a substantial lessening of competition.

Microsoft originally appealed against the decision to the Competition Appeal Tribunal, but this process was dropped while Microsoft draws up proposals for changes to the deal that may address the CMA’s concerns.

In August 2023, the CMA initiated a phase one investigation into these modified proposals, with a deadline of October 18. To address the CMA’s cloud concerns, the new deal no longer includes cloud gaming rights to Activision Blizzard’s console and PC games, which have been sold to an independent third party: Ubisoft.

The CMA is treating this as a separate acquisition, and as such the block against the original deal still stands. On September 22, the regulator said it had preliminarily approved the modified deal.

The EU has approved the deal, so why do Microsoft and Activision need US or UK approval?

These three regulators all have the power to block the deal or impose conditions, and their rulings may be applied globally.

Regulators can approve the deal, reject the deal, or approve the deal under certain conditions designed to preserve competition.

A condition could be that Microsoft can complete the deal if Activision Blizzard games remain multiplatform, for instance. They could stipulate that Activision Blizzard must remain as its own independent organisation (although analysts believe this is unlikely). All sorts of conditions could be placed on the deal that might make an unacceptable acquisition acceptable.

A better example is the interim order the CMA published after it blocked the deal, which prohibits Microsoft and Activision Blizzard from investing in each other (or any of their subsidiaries) without prior written consent from the UK regulator.

However, conditions can be hard to enforce, and require teams to make sure that business is being conducted fairly.

Can the FTC’s legal complaint block the deal?

Well, not any more because the FTC has withdrawn it following a request from Microsoft and Activision Blizzard, plus its defeat in the District Court and denial of an appeal by the Ninth Circuit.

For context, however, the FTC does not have the authority to approve or disapprove an acquisition or merger, but the filing of this complaint started legal proceedings that could see the deal ultimately blocked by the US courts.

Its legal complaint was going to be addressed in a hearing before an administrative judge at the FTC, scheduled for August 2023.

In June 2023, The FTC called for a US court to prevent Microsoft and Activision from completing the transaction ahead of the August hearing, citing press reports claiming the two companies were “seriously contemplating” doing so despite the UK block and the Commission’s upcoming legal proceedings. The US court denied the FTC’s request after a week-long hearing.

The FTC filed an appeal against this decision, but its request was rejected.

If the case had reached the August hearing, the judge’s decision could still have been appealed by the FTC, Microsoft and/or Activision, which would move it to the US Court of Appeals and potentially all the way up to the US Supreme Court. Microsoft could also have reach a settlement with the FTC at any point during this time.

If the deal completes, the Commission does have the option to sue for divestiture – compelling Microsoft to sell off part of Activision’s business, e.g. Call of Duty – but this can only be done after all appeals have been settled, which may take several years.

What are regulators concerned about specifically?

As you may have seen in the press, the main concern around the Activision Blizzard acquisition was initially focused on one franchise: Call of Duty.

Call of Duty is one of the biggest and most popular games in the world, and the regulators will need to decide whether Microsoft owning this franchise has the potential to make the company dominant in the video games space, and therefore create an antitrust situation that might impact consumers negatively.

As the investigations continued, concerns were also raised about the combination of Microsoft’s cloud gaming offering and Activision Blizzard’s games (including Call of Duty) could hand Microsoft dominance over the cloud gaming market.

Let’s take a look at what each of the three main regulators have said so far:

The Federal Trade Commission

Chief among the FTC’s reasons for attempting to block the deal was Microsoft’s history of “acquiring and using valuable gaming content to suppress competition from rival consoles.”

The FTC specifically cited the $7.5 billion acquisition of ZeniMax Media, which owns Bethesda. Despite repeated assurances to antitrust regulators ahead of this merger that it would not withhold games from rival platforms, it later announced next year’s hotly anticipated Starfield will be exclusive to Xbox and PC.

“Microsoft has already shown that it can and will withhold content from its gaming rivals,” Holly Vedova, director of the FTC’s Bureau of Competition, said at the time. “We seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets.”

(It’s worth nothing that there was some confusion over whether the FTC’s statement about Microsoft offering assurances to the EU about not making Starfield exclusive was misleading)

While Activision has historically been a multi-platform publisher, the FTC believes this “could change if the deal is allowed to proceed.”

“With control over Activision’s blockbuster franchises, Microsoft would have both the means and motive to harm competition by manipulating Activision’s pricing, degrading Activision’s game quality or player experience on rival consoles and gaming services, changing the terms and timing of access to Activision’s content, or withholding content from competitors entirely, resulting in harm to consumers,” the Commission wrote.

The European Commission

When it released its preliminary findings on November 8, 2022, the European Commission said it needed to investigate further because the merger “may significantly reduce competition on the markets for the distribution of console and PC video games, including multi-game subscription services and/or cloud game streaming services, and for PC operating systems.”

The EC was particularly concerned that Microsoft “may foreclose access to Activision Blizzard’s console and PC video games, especially to high-profile and highly successful games (so-called AAA games) such as Call of Duty.”

Specifically, the Commission said it was worried that Microsoft would keep Activision Blizzard games off of rival consoles, or “degrading the terms and conditions for their use of or access to” those games on other consoles.

It was also concerned about the impact the deal could have on competition in the subscription and cloud-streaming markets, as well as furthering Microsoft’s hold on PC operating systems by ensuring Activision Blizzard games were only distributed through Windows operating systems.

On January 31, 2023, the EU issued a formal antitrust warning to Microsoft.

On May 15, 2023, the EU approved the deal, deeming its previous concerns about the potential impact on competition in the PC, console and multi-game subscription spaces to be a non-issue. However, it was still concerned about competition in the cloud gaming space, but accepted Microsoft’s proposed remedy to address this.

Microsoft offered to give consumers in the European Economic Area a free license for ten years to stream all current and future Activision Blizzard PC and console games for which they have a license, and to stream them through the cloud streaming service of their choice.

Along with that, Microsoft also offered a free license (again, for ten years) to cloud streaming services to allow players in the EEA to stream any of Activision Blizzard’s PC and console games.

The Competition and Markets Authority

The UK regulator has been the most detailed so far when discussing its concerns over the deal, with more information here and here.

To summarise, the CMA is concerned that:

the deal will harm PlayStation and other multi-game subscription offerings as Microsoft may withhold Activision Blizzard content from them
Microsoft may use Activision Blizzard, alongside other Microsoft services, to out-compete rivals such as Google, Amazon and Nvidia in the game streaming space
the acquisition of Call of Duty and any potential exclusivity on Xbox will create a sizeable network effect on Microsoft’s platform (pointing to the ‘network effect’ of the console market, where a console with a lot of gamers attracts more content, which in turn attracts more gamers)
Activision Blizzard games that would have possibly (even likely) come to other subscription services will be kept exclusive to Xbox Game Pass

“The CMA is concerned that having full control over this powerful catalogue, especially in light of Microsoft’s already strong position in gaming consoles, operating systems, and cloud infrastructure, could result in Microsoft harming consumers by impairing Sony’s – Microsoft’s closest gaming rival – ability to compete as well as that of other existing rivals and potential new entrants who could otherwise bring healthy competition through innovative multi-game subscriptions and cloud gaming services,” the regulator wrote.

In March 2023, the UK regulator retracted its concerns about Call of Duty becoming exclusive to the Xbox ecosystem, reasoning that Microsoft doing so would be “significantly loss-making under any plausible scenario.”

On April 26, the CMA blocked the deal, pending appeal. It later introduced additional restrictions preventing Microsoft and Activision Blizzard from investing in each other, or their subsidiaries.

What has Microsoft said to address these concerns?

With all three regulators, Microsoft can offer concessions and assurances in the hopes of convincing the relevant bodies to approve the deal. While these concessions are not always made public, we do know that Microsoft has promised to make Call of Duty available for Steam and Nintendo platforms for at least ten years.

There have also been reports that Microsoft has offered agreements of varying lengths (up to ten years) to keep Call of Duty on PlayStation, and is even willing to put Call of Duty into PlayStation Plus.

Microsoft has been attempting to address the cloud gaming concerns via ten-year deals to bring Xbox games (including Activision titles if the deal goes through) to multiple services, including Nvidia GeForce Now, Boosteroid and Ubitus. It has also signed a similar deal with UK mobile provider EE.

The Xbox firm has also proposed to the CMA that it will sell the cloud gaming rights for Activision Blizzard’s console and PC titles, including any released in the next 15 years, to Ubisoft – an indepedent third party that can ensure Microsoft does not hold all the power over which cloud gaming platforms these games appear on.

Why is it a problem if Microsoft becomes dominant in games?

One company being dominant in a space can stifle competition, limit growth and reduce innovation, which potentially harms consumers. If there was one business that had the dominant console, or subscription service, or distribution channel, it would mean all game developers – of all sizes – would be overly dependent on that one company.

Competition is a good thing. It means there is increased choice and can ensure prices remain low. It forces companies to innovate and adapt. It means they must be competitive and work harder to look after its audience and partners.

Right now the games space is very competitive, with various companies pushing each other to try new things, improve their services and create better products.

Is Call of Duty likely to make Microsoft dominant in games?

This is the key question. As revealed in recent documents as part of Brazil’s regulatory research, PlayStation (unsurprisingly) thinks it will. Call of Duty is a significant IP with a large fan base. It’s not just the biggest game on Xbox, but also the biggest game on PlayStation.

Microsoft (also unsurprisingly) does not agree. It believes Call of Duty is not particularly unique and actually faces strong competition as it stands.

One of the key parts of the debate is whether Microsoft will make Call of Duty unavailable on Sony’s platforms. Microsoft insists it will continue to make Call of Duty games on all devices, but this promise doesn’t offer specifics.

There are contrasting precedents that people are using to indicate what Microsoft may do. Minecraft, another major Microsoft gaming acquisition, continues to be supported equally across every platform.

However, with Microsoft’s acquisition of Bethesda, the company has adopted a different approach. Some titles continue to be supported on PlayStation (particularly live service games like Elder Scrolls Online), whereas future new games, such as the upcoming Starfield, will not.

So is it all about the games console space?

One of the key parts of the conversation is not just the role Call of Duty might play in the game console market, but also in terms of streaming and subscriptions. The former is a distribution model where games can be streamed and played on almost any device, while the latter is a business model where gamers pay a monthly fee to access a selection of games.

Microsoft is a major player in this space with its Game Pass subscription model and Xbox Cloud Gaming system. Microsoft’s subscription offering is unique in that its features new AAA game releases on the day they come out, which its competitors (including Sony) say they can’t financially justify. Microsoft also has an advantage in the cloud streaming space as it owns Azure, one of the biggest cloud computing operations in the world. It must be noted that other competitors in this space, including Google and Amazon, have similar advantages to Microsoft when it comes to cloud technology and services.

So even if Call of Duty does continue to release on other platforms as it does now, the game – plus Activision Blizzard’s other titles – would certainly have a positive impact on Xbox’s subscription and streaming business.

In other words, there are a lot of factors for regulators to consider. Ultimately, they don’t care about Sony or any other competitor – it’s purely about the impact on the consumer.

If Disney can buy Star Wars, Marvel and Fox, surely Xbox can buy Call of Duty?

There has never been an acquisition like this in video games before, so it’s tempting to look at our sister industries for insight. But the comparisons are not like-for-like. For instance, it’s unlikely you’ll find people that only watch Star Wars or Marvel films, but it’s quite possible you’ll find people who only (or mostly) play Call of Duty games.

Obviously, Disney’s acquisition of these brands, plus Fox, has enabled it to become a major player in the TV streaming and subscription market. But regulators have concluded that these deals are not enough to harm competition, particularly considering the size and capabilities of companies like Netflix, Amazon and Apple.

In games, the subscription business is still in its early stages (and streaming is even earlier), and it’s not certain how significant they might become. Therefore part of the discussion will be how likely subs will become the primarily business model for games, whether streaming will become a significant distribution method, and what that might mean for competition in video games.

Who did the regulators talk to?

Alongside obvious players like PlayStation and Nintendo, regulators will likely speak to a broad spectrum of games companies, including smaller developers, large publishers, trade bodies, analysts, data firms, plus major conglomerates such as Apple, Google, Amazon and Meta, who are all continuing to invest in expanding their video game capabilities.

Could Microsoft just give up on the acquisition?

Microsoft can, at any point, decide to cancel its planned acquisition of Activision Blizzard. However, this will come with a hefty cost.

If it scraps the deal before August 29, 2023, Microsoft will need to pay a ‘penalty fee’ of $3 billion. This increases to $3.5 billion between August 29 and September 15, before raising to $4.5 billion. The question is whether the cost of legalities and other proceedings, as well as the benefits of owning Activision Blizzard, outweighs these costs.

Expect to read a lot more about this acquisition in the months ahead. For the immediate future, Call of Duty and the other Activision Blizzard properties will continue to be supported fully across multiple platforms.

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