Contact Our Technology Law Solicitors Today
You can contact our specialist Technology Law experts for legal support on the topics discussed in this article and any other business-related assistance you may require. You can contact the team on:
Goodbye to Call of Duty? The Frontlines of the War on Competition
The Competition and Markets Authority (CMA) estimates that, in 2022, roughly £5 billion was spent on gaming in the UK and that there are around 45 million gamers in the UK, with more spent on gaming than any other form of entertainment including music, films, TV and books.
The biggest players in this market are Tencent, Sony and Microsoft, who compete with each other across the release of their games, consoles, digital distribution platforms, cloud gaming services and more. Our Technology Law Experts take a look at the legal implications of Microsoft's acquisition of Activision.
Microsoft's Proposed Acquisition of Activision
In January 2022, Microsoft entered into a $68.7 billion acquisition of US video game publisher Activision Blizzard Inc (Activision). Activision is one of the biggest third-party game developers and publishers in the world, whose titles include Call of Duty (CoD), Overwatch, World of Warcraft (WoW) and Candy Crush. The transaction will be the largest video game acquisition in history if it goes ahead.
Microsoft is a big player on multiple levels:
- Its Xbox console is the rival console to Sony’s PlayStation.
- Windows is the leading operating system for PC games.
- Microsoft also owns a fast-growing cloud gaming service (as an alternative for those gamers who wish to purchase something other than an expensive gaming console or PC).
Microsoft accounts for an estimated 60-70% of global cloud gaming services and has global cloud computing infrastructure via Azure and Xbox Cloud Gaming.
In September 2022, the CMA and other competition authorities in the EU and US began an in-depth investigation into the proposed deal with Activision to assess its risk to competition.
As part of this investigation, alongside site visits, analysis of internal documents and other evidence gathered from game publishers and developers and cloud service providers, the CMA polled a sample of 40,000 gamers who play CoD on PlayStation to get a sense of how important the game is to them and what they might do if the game became partially or totally exclusive to Xbox following the merger.
Why did the CMA Launch an Investigation?
A large competition concern is that the deal would weaken the important rivalry between Sony’s PlayStation and Microsoft’s Xbox consoles, as the two currently compete closely with each other. The principal element of this is that it would commercially benefit Microsoft to make Activision’s games exclusive to its own consoles or give its rivals access to pricier, watered-down or delayed versions.
CoD is hugely popular and is currently available on both. If CoD is no longer available on PlayStation or available at a higher price, players may consider switching to Xbox instead, where they can access it on Xbox Game Pass, Microsoft’s monthly subscription service. In previous acquisitions of other games studios, such as Bethesda (whose games include Fallout, DOOM, Skyrim and the Elder Scrolls), Microsoft has used this console-exclusive strategy.
Although a global deal, competition authorities consider the deal’s potential effects on gamers in their respective jurisdictions. In December 2022, the US antitrust regulator Federal Trade Commission (FTC), asked a judge to block the deal over concerns that Microsoft’s Xbox consoles would have exclusive access to Activision’s games.
Earlier this month, the European Commission (EC) warned Microsoft about the potential anti-competitive impact of the deal (but is yet to reach an official decision).
The EC is reportedly unlikely to demand that Microsoft sell any Activision assets as a condition of its regulatory approval, in direct contrast to the CMA’s position.
What Action can the CMA Take?
In February 2023, the CMA stated that it considers the takeover could substantially cut competition in the UK market for both console gaming and cloud gaming services, resulting in “higher prices, fewer choices or less innovation for UK gamers”.
The CMA considers that the merger could make Microsoft even stronger in cloud gaming, which could stifle competition in a growing market and harm UK gamers who cannot afford expensive consoles – as lower-income players particularly use cloud gaming services.
The CMA has powers to investigate activities which may breach competition law, impose legally binding remedies, issue fines for non-compliance, and disqualify directors.
Other than blocking the Microsoft merger with Activision, the CMA has suggested three structural remedies, none of which are likely to be attractive to Microsoft, which involve:
- selling the particular business associated with CoD;
- divesting Activision Publishing (the group company that owns CoD); or
- divesting Activision Publishing and Blizzard Entertainment (the group company that owns Warcraft).
Alternatively, and more attractively from Microsoft’s view, are behavioural remedies, which typically aim to regulate the future conduct of the merged company (such as via licensing agreements with other game providers), which may alleviate some of the competition concerns or their adverse effects.
However, behavioural remedies are only used where the divestitures set out above are not feasible, or the behavioural measures will preserve substantial relevant customer benefits, which would be removed by the structural remedies (and the CMA does not believe this to be the case).
If you need any advice regarding mergers, you can get in touch with our Merger & Acuisition Solicitors.
What Happens Next?
Following the CMA’s response and the EC’s warning, Microsoft has made several announcements showcasing its willingness to offer licensing deals to rivals (and unwillingness to divest the lucrative CoD franchise).
Microsoft has stated it is committed to offering equal long-term access to CoD to Sony, Steam, Nvidia, Nintendo and others to preserve the deal’s benefit to gamers and developers and increase competition in the market.
At the end of February 2023, Microsoft announced that it had signed 10-year licensing deals with Nintendo (to allow CoD to be offered on its Switch console) and Nvidia (a global cloud gaming service provider) to allow all Xbox games and Activision titles playable on PC to be offered on its GeForce Now service. Such an offer, of course, is conditional on the deal going ahead.
Microsoft has purportedly offered the same deal to Sony, but no agreement has yet been reached as Sony still opposes the deal.
Competition forces businesses to innovate new products and services and lower prices. If the existing competition between Microsoft and Sony is reduced because of this deal, all gamers could see higher prices, reduced range, lower quality and worse service in gaming consoles over time.
However, even with the deal, Microsoft would still be third behind Tencent and Sony in gaming revenue, and it could be argued that the acquisition would only strengthen the rivalry between Microsoft and Sony.
Summary
With the CMA’s biggest concern being games becoming console-exclusive, perhaps Microsoft’s promises and steps to licence CoD to its rivals will satisfy the regulator. For many gamers, these promises may be welcome news.
Sony acquired Bungie (the creators of sci-fi games Halo and Destiny) in mid-2022 in a $3.6 billion acquisition, and Bungie’s games remained available on a cross-platform basis, and now with Activision’s CoD and Warcraft looking to remain cross-platform, the deal may herald a new era where, despite a major console manufacturer purchasing a big game publisher, those games do not become console-exclusive.