Microsoft’s blockbuster $75bn acquisition of Activision may have been teetering on the edge of failure on Wednesday, but its shareholders had other things on their minds.
The software company’s shares jumped more than 7 per cent the day after it reported a resurgence in its cloud computing business and reiterated a determination to capitalise on its early lead in generative AI. If the UK’s Competition and Markets Authority’s announcement that it would block the Activision takeover jeopardised an important strategic move, the message was lost on Wall Street.
There could hardly have been a starker sign of how far the tech landscape has shifted in the 15 months since Microsoft’s bid for Activision shocked the gaming world.
“There are other priorities ahead of gaming, with everything that’s happening around the cloud and AI,” said Brent Thill, an analyst at Jefferies. Microsoft’s big institutional investors rarely mention its gaming business, he said, adding that the Activision purchase had come to be seen only as “a nice-to-have, not a must-have”.
While the altered tech landscape has raised a question about how determined Microsoft would be to try to push through with the deal, people close to the companies insisted they would appeal against the UK decision. But with the Federal Trade Commission in the US already acting to block the transaction and the EU yet to reveal its stance on the deal, the odds of success appeared to be widening sharply.
The CMA’s rejection of the games industry’s biggest-ever acquisition follows what the companies claim have been mistakes and misunderstandings in a process that exploded into unusually bitter public recrimination.
The UK regulator faced an embarrassing setback in February, when Microsoft spotted what they believed was a glaring error in the analysis competition officials had used to reach a provisional view that Microsoft would try to make Activision’s smash hit game, Call of Duty, exclusive to Xbox, hurting rivals like Sony. According to Microsoft, the CMA based its analysis on five years of expected profits from withholding the game from PlayStation, while taking into account only one year of potential losses from that strategy, skewing the calculation.
A month later, Microsoft appeared to be vindicated when the CMA reworked its analysis and dropped its concern about the console market. While the companies believed that they had cleared the biggest hurdle, they underestimated the significance of something that had been widely seen as a lesser issue.
On the CMA side, a view was hardening about potential problems in the nascent market for cloud gaming, which involves streaming games over the internet.
Microsoft had presented its acquisition as a win for consumers. While Activision chief executive Bobby Kotick has not made its games available on cloud services and appeared sceptical about its future, the software company said it wanted to bring the games to the cloud, meaning that consumers would have more options for how to play.
However, the CMA feared that Microsoft was planning to corner a market that could one day account for a significant part of gaming. After poring over 3mn internal documents including emails and board minutes, and interviews with Activision and Microsoft staff as well as industry executives, the panel decided the software company had a commercial incentive to use games like Call of Duty to consolidate its grip on the new cloud gaming market, rather than licensing them to rival platforms.
According to one lawyer close to the review, the CMA was “polite in the room and listens to evidence, and then they write things up that effectively suggests they don’t believe the evidence that was provided to them”.
The decision has left the opposing sides disputing the impact of the deal on a market that barely exists. The CMA said on Wednesday that the software company already has 60-70 per cent of the global cloud gaming market — to which Microsoft president Brad Smith retorted that the UK regulator had “a flawed understanding of this market and the way the relevant cloud technology actually works”.
Most subscribers to Microsoft’s Game Pass service, which offers cloud access, only use the service to download games, with streaming limited to a relatively small number who pay for a premium service.
Pure cloud gaming platforms, on the other hand, have been slow to take off — despite long-running predictions that they will one day dominate the gaming world in the same way that streaming video is swallowing the TV industry. Google closed its ambitious Stadia games project last year, while Amazon’s rival Luna platform has been slow to gain traction.
Game streaming has suffered from the lack of a “killer app” for the technology, with most serious gamers preferring to use a powerful console or gaming PC, said Joost Rietveld, a former games industry executive.
The uncertainty over the future of the cloud gaming market has become one of Microsoft’s biggest hurdles. The software company claims licensing deals it has signed with companies like Nvidia demonstrate its willingness to support a competitive cloud market.
But these services are not full-scale cloud platforms, making them weak indicators of how the market will eventually take shape, said Rietveld, who is now an associate professor at UCL School of Management. The CMA also said on Wednesday that Microsoft’s existing cloud agreements were too weak a foundation to base the deal on.
On Wall Street, meanwhile, the UK regulators’ intervention appeared to underline another new reality for the biggest tech companies. It is the clearest sign so far that regulators are now intent on blocking big mergers that would extend Big Tech’s power into new markets, said Thill at Jefferies. As such, he added, the action “hinders all of tech”.