For almost a year now, the industry has been operating under one major assumption about how the competitive landscape is going to look in the coming years – namely that by some point in 2023, Activision Blizzard would become a subsidiary of Microsoft, with the $68 billion acquisition seeing the giant publisher slotted in alongside Xbox Game Studios in Microsoft’s newly minted Gaming division.
The deal, initially announced back in January, would arguably be the most significant reordering of the games business since 2001, when Microsoft first entered the console market just months after Sega bowed out of the hardware business, and would make Microsoft’s games business into the third largest in the world by turnover, after Tencent and Sony.
After months of preparing for that eventuality and wrapping our heads around its implications, though, there are questions starting to be asked about the extent to which this deal is actually a fait accompli.
We’re very used to seeing mergers and acquisitions work out a certain way in the games business; there’s an initial announcement, a few months in which a bunch of lawyers earn their cut of the deal, and then a rather less high-profile announcement that the deal has actually completed as planned. Rarely is there any doubt about the ultimate outcome. Once the acquisition has been announced, people tend to treat it as a done deal, with the completion of the acquisition merely being a bureaucratic step. But to assume that the Microsoft-ABK deal will work the same way is to underestimate how unusually large this deal is, and consequently, just how unusually concerned state regulators are likely to be about its impacts.
Much has been made of the fact that at $68 billion, this deal dwarfs any previous merger or acquisition in the games space, but we shouldn’t forget that this isn’t just a huge deal by games industry standards – it’s also Microsoft’s biggest ever acquisition (more than twice the value of its previous record-holder, the 2016 acquisition of LinkedIn), and a mammoth deal by the standards of almost any industry.
Microsoft and its lawyers would have known up-front that a deal of this scale would attract serious scrutiny from regulators all over the world simply because of its scale in cash terms. But as several important regulatory bodies have started to show concern about the competitive implications of the deal, the long timeframe for the deal’s completion (which was already expected to take well over a year) is starting to look like it might actually have been quite conservative.
Companies as big as Microsoft and Activision Blizzard don’t get to acquire each other without significant oversight and investigation, and even with the smoothest sailing possible, this deal was going to require months of investigation before being approved. The sailing, however, has not been all that smooth.
Microsoft saw some quick wins with rapid approval of the deal in a few smaller territories, but it has run into more sceptical responses from competition authorities in the United States, the European Union, and the UK. The past week alone has seen reports citing sources close to the US Federal Trade Commission investigation suggesting that a lawsuit to block the deal is being prepared, while information released by the UK’s Competition and Markets Authority and reports from around the EU’s European Commission hint at potential obstacles from one or both of these investigations into the merger.
In each region, the main concerns of the authorities seem to be around the Call of Duty franchise, and the potential implications for competition (and thus ultimately for consumer choice and value) that would follow from CoD being owned by one of the platform-holders rather than by an independent third-party publisher.
This myopic focus of the authorities on Call of Duty has attracted some reasonable criticism, and is arguably a narrow view that focuses too much on one (admittedly very popular) franchise and fails to consider the overall effect of the entire Activision-Blizzard-King catalogue being owned by Microsoft.
The scale of Call of Duty is significant, though, and one could also argue that its status as Activision’s biggest franchise simply makes it into a convenient shorthand for the broader concern about this situation – the question of whether it’s okay for an enormous company to use wealth stemming from other activities to artificially buy its way to the top of another industry in which there is already a healthy degree of competition among major players.
The release by the UK’s CMA of some of the arguments made by both Microsoft and Sony to the authorities has certainly been interesting – both in terms of seeing how the companies argue for and against the Activision deal, and in getting an unusually realistic and honest assessment from each company of its market strengths and weaknesses.
Microsoft’s statements are pretty blunt about Sony having a much more impressive first-party software line-up, arguing that the Activision deal would simply allow it to compete more effectively with Sony on this front. Sony, for its part, points to how far ahead Microsoft is commercially with Game Pass, which has been a much more successful service thus far than the subscription tiers of PS Plus, and argues that Call of Duty occupies a unique position in the industry (noting how far ahead of rival franchises like Battlefield it is commercially) such that losing it to Game Pass exclusivity would create an unassailable lead for Microsoft.
Much as it’s interesting to see these companies make statements about their products and market positions that are for once designed to be humble and realistic, rather than being pumped up with the usual bombast, there’s nothing truly surprising in the documents released by the CMA.
The positions of the companies are quite realistic, and the questions and considerations that the competition authorities in the UK and elsewhere will be mulling over in light of those representations also seem obvious. To what extent is Microsoft’s claim to be so far behind Sony in terms of first-party software justified, especially given the billions of dollars Microsoft has spent on other acquisitions in recent years?
This must be balanced against the question of to what extent it is fair to consider Game Pass as a whole new business area which Microsoft currently dominates, rather than just as a small facet of the overall console business – a question which is vital to determining whether the ABK acquisition would be helping Microsoft to catch up to a more successful rival, or whether it would constitute putting an unassailable moat around an already market-leading business.
These are all fair questions, and reasonable people may take different positions on them – certainly, both Microsoft and Activision Blizzard are quite strident about how they feel these questions should be interpreted, but it seems naïve to suggest that there’s really a clear and simple interpretation of this situation. Knowing now that these are the areas in which the competition authorities are seeing issues in the deal, it no longer seems like this acquisition is going to sail through the regulatory approval process unhindered in all major territories, as had originally been assumed.
Of course, even if the FTC does file a suit against the deal, as rumoured, or if the EU and/or UK do decide to raise barriers of their own, as seems likely, this doesn’t mean the deal will be called off – there are many options, including various kinds of arbitration and signing of contractual obligations to protect certain areas of competition, that fall short of the nuclear option of just walking away from the whole acquisition.
If nothing else, however, the possibility that this deal is not approved and does not go through has to be considered more seriously in light of this week’s news. That raises some interesting questions about how the industry landscape looks in 2023 and beyond if the deal doesn’t go through; does it leave Microsoft desperate to find another deal that will give it the market leadership it craves, or would it be fearful of any future deal of similar scale running into yet more regulatory barriers?
Perhaps more concerning is the question of what would happen to Activision Blizzard in the eventuality of this deal falling apart. The company has faced serious internal problems in recent years, with the acquisition by Microsoft being seen to some extent as an opportunity to turn a page on issues with harassment and abuse, which have fed into a collapse in trust in the company’s current leadership.
If the Microsoft deal unravels, those issues will come back to the surface – joined by a new current of discontent from those who were hanging on in the hope of seeing financial rewards in terms of stock options and other bonuses from the Microsoft buyout. I don’t doubt that a company like Activision Blizzard could survive the collapse of this kind of buyout deal, but the problems it could cause for morale and staff attrition could be very significant – not to mention the likely hammering it would cause for the company’s share price.
All this being said, we should be clear that the odds of the Microsoft-ABK deal actually completing remain high – just not, perhaps, quite as high as the companies involved would like. Even after the rumours that the FTC is preparing a case against the deal were reported, Activision Blizzard’s share price was trading up this week – it’s still at a discount relative to the price Microsoft offered, indicating that the markets are pricing in some risk to the deal going through, but it’s a relatively small difference and the markets don’t seem to have been shaken all that much by the latest reports around the regulatory investigations.
The markets have been wrong before, of course, and they do tend to have a blindspot with regard to just how aggressive and sharp-toothed European regulators can be about these issues (something which Twitter’s new management is likely to find out in the worst way possible in the coming weeks and months). Nonetheless, the assessment that the deal carries some risk but is still more likely than not to complete seems fair. The waters are rougher than anticipated, but the ship isn’t off course just yet.
But this giant deal and its reshaping of the industry landscape seems a little less certain this week than it was last week, and the question of what the industry looks like if Microsoft’s attempt to buy its way to the top is blocked has become that bit more relevant in the process.
