Anyone who has dabbled in the wide world of video games will probably know of Activision Blizzard, or at the very least will have heard of its games. Think Call of Duty, World of Warcraft, Overwatch, Diablo, StarCraft. Yes, even Candy Crush! If you happened to produce a top gaming console, it sure would be nice to have all of those games in-house. And that’s exactly what Microsoft was thinking when it offered to acquire Activision Blizzard in January 2022:

“This acquisition will accelerate the growth in Microsoft’s gaming business across mobile, PC, console and cloud and will provide building blocks for the metaverse.”

That statement was made back when the metaverse was all the rage; how times change! But what the acquisition was really all about was cloud gaming, which is anything but vapourware. Specifically, the sweet, sweet recurring revenue that comes from ‘Game Pass’, which is Microsoft’s Xbox subscription service:

“The acquisition also bolsters Microsoft’s Game Pass portfolio with plans to launch Activision Blizzard games into Game Pass, which has reached a new milestone of over 25 million subscribers. With Activision Blizzard’s nearly 400 million monthly active players in 190 countries and three billion-dollar franchises, this acquisition will make Game Pass one of the most compelling and diverse lineups of gaming content in the industry. Upon close, Microsoft will have 30 internal game development studios, along with additional publishing and esports production capabilities.”

It’s the threat of Activision’s games being available exclusively on Microsoft’s Game Pass that had competitors such as Sony (producer of the rival PlayStation) up in arms. And at least one regulator, the UK’s Competition & Markets Authority (CMA), recently bought it:

“We found that the Merger would make Microsoft even stronger and substantially reduce competition in this [cloud gaming service] market. We found that Activision’s titles—including CoD, World of Warcraft, and Overwatch—will be important for the competitive offering of cloud gaming services as the market continues to grow and develop. We found that, after the Merger, Microsoft would find it commercially beneficial to make Activision’s titles exclusive to its own cloud gaming service. Given its already strong position, even a moderate increment to Microsoft’s strength may be expected to substantially reduce competition in this developing market, to the detriment of current and future cloud gaming users.”

If you define a market narrowly enough, any potential merger will look like it could cause consumer harm. And that’s exactly what the CMA has done in this case: define away the bulk of the gaming market until you’re left with the much smaller “cloud gaming services” (~4% of total North American and European game markets). And the reason it’s a tiny market? Because Microsoft created it! It was no easy feat, either: just look at Google’s attempt, Stadia (RIP).

The CMA is essentially punishing Microsoft’s successful innovation, while also making three rather bold assumptions about the direction of the new “cloud gaming services” market it created, including that:

  • it will grow to have a significant share of the gaming world;
  • Microsoft will capture more of that market as a direct result of this merger; and
  • the cloud gaming landscape will forever remain the same once that happens, with every potential competitor (including Sony) at Microsoft’s mercy.

In making its decision to block the merger, the CMA implicitly took those assumptions as a given. I can only assume the CMA’s members are also heavily invested in “cloud gaming services” companies, because if their forecasting abilities are as good as their ruling implies, they should all be able to retire incredibly wealthy.

But we all know that’s not true. The CMA is making the mistake of viewing the gaming market through a relatively static lens, notwithstanding its acknowledgement of the “growing and fast-moving nature of cloud gaming services”, which it actually used to argue that Microsoft’s proposed remedy (10-year royalty-free guarantees to various cloud gaming providers) was insufficient. Go figure.

In reality, the merger is probably good for many gaming enthusiasts – such as the around 25 million subscribers to Game Pass – and bad for others, such as PlayStation aficionados (PlayStation Plus has around 50 million subscribers). At least in the short term, anyway: the great thing about contestable markets is if Microsoft does start walling off Activision’s games (it won’t; the CMA ruling acknowledged that it’s far too profitable to sell on all platforms) then there’s a huge incentive for a competitor, whether Sony or some yet-unheard of producer, to get involved and cut itself a piece of that growing pie.

If markets are contestable (i.e. entry and exit are not blocked by regulation), dominant positions rarely last long. Just ask Kodak, Nokia, Yahoo, Xerox, MySpace, Blockbuster… you get the idea. The CMA’s decision is a slap in the face for innovation and standard competition policy, and gamers in the UK should be ashamed of it.

Addendum: Locally, the Australian Competition & Consumer Commission (ACCC) has suspended its review of the deal “pending receipt of information”. It’s also currently “engaging with overseas regulators”, which is code for ‘we’ll just go along with whatever the rest of the world decides’. That’s probably the right move from the bureaucracy’s self-interest; no need to unnecessarily make global headlines over your decision when you can let the poms do it instead! But it also speaks volumes about the culture within the ACCC.