Some observers have welcomed the ruling, arguing that regulators have allowed tech companies to amass too much power by scaling up through acquisitions. “We feel like there’s been more than a decade of under-enforcement,” said Max von Thun, Europe director at Open Markets think tank, referring to previous decisions to merge Facebook with WhatsApp and Instagram. “Our concern would be that having the Activision catalog would give Microsoft an indisputable advantage in this market over other cloud gaming services.”
Others, including – unsurprisingly – Microsoft, have challenged the ruling, saying the CMA misunderstood how the cloud gaming industry is structured. “The CMA’s decision rejects a pragmatic path to addressing competition concerns and discourages technology innovation and investment in the UK,” Microsoft vice chairman and president Brad Smith said in a statement. Smith said the CMA’s decision was based on a “lack of understanding of this market and how the relevant cloud technology really works.”
Joost Rietveld, a professor at University College London who studies technology platforms, argues that cloud gaming is not a separate market. “You have very different companies using cloud gaming in very different ways and targeting very different customers,” he says. “They’re lumping all of these offerings together, and it’s unclear if they’re actively competing with each other and if there’s this uniform harm to consumers if this deal goes through.”
The merger has already been cleared by competition authorities in Japan, Brazil and South Africa. The European Union is still considering the deal, while the US Federal Trade Commission filed a lawsuit last August to block the merger. The hearings in that case will begin in August of this year. Some in the technology sector see the move by the UK regulator as a kind of power play.
The CMA’s decision comes days after the UK government announced it would give the agency new powers to fine companies of up to 10 percent of their global revenues if they breach local competition rules, and a new “Digital Markets Unit” has been created which is supposed to protect consumers and improve competition within the UK technology sector. This has caused some unrest in the industry. “The CMA has become increasingly prominent globally in recent years as an enforcer of competition, especially post-Brexit,” said Richard Pepper, a partner at the law firm Macfarlanes. “They are increasingly seen as aggressive in merger control. But this is really the biggest deal they’ve blocked.”
The decision doesn’t spell the end of Microsoft’s move to cloud gaming, but it will likely slow it down. According to Daniel James Joseph, a senior lecturer at Manchester Metropolitan University who specializes in the games industry, larger games companies have often pursued growth through acquisitions in recent years. “All the data, pretty much every year, indicates the dynamic that the merger represents: the big ones are getting bigger,” he says. “Acquisitions are now the name of the game for industry growth, rather than, say, innovation.”
The company can still grow, but not so easily. “For Microsoft’s cloud gaming ambitions, even if this setback were to prove fatal to the Activision deal, there are many other ways to expand into that market, such as acquiring smaller game publishers,” says Alex Connock, Senior Fellow in Management Practice at Said Business School, University of Oxford.
But scaling slowly may not be what Microsoft wants to do. The move to cloud gaming wasn’t just about building his entertainment business. Cloud infrastructure is a business of scale: businesses need to grow big and keep growing. Having your own services in the cloud, including data-intensive services like gaming, is a big deal.
Microsoft is already a cloud computing giant, through its cloud computing company Microsoft Azure. In cloud infrastructure services, Microsoft and Amazon have a combined market share of between 60 and 70 percent, according to an April report from the UK communications regulator. UC Berkeley’s Weber says boosting cloud gaming could strengthen Microsoft’s position in the market by fueling demand for cloud services. “The greater the demand, the better the business,” he says. “Cloud gaming is already and will become a much larger source of demand for cloud infrastructure.”
Updated 4/26/2023, 4:15 PM EDT: This article has been updated to correct the spelling of Steven Weber and Max von Thun’s names.
