Bad for Britain, Bad for Microsoft (Premium)

In what can only be construed as a threat to the country, Microsoft president Brad Smith said that blocking his company’s acquisition of Activision Blizzard would be “bad for Britain.” It was an understandably aggressive statement, given the amount of time and effort Mr. Smith and Microsoft have put into satisfying the petty needs of regulators, not to mention the rollercoaster ride they’ve been on thanks to the UK Competition and Markets Authority (CMA).

Let’s dissect it.

In January 2022, Microsoft announced that it intended to acquire game-making giant Activision Blizzard for $67.8 billion. At the time of the announcement, Microsoft noted that Activision Blizzard’s “fantastic franchises” would “accelerate [its] plans for [Xbox] Cloud Gaming” and bring Xbox to “phones, tablets, laptops and other devices,” and that it would continue to support Activision Blizzard games on the “variety of platforms” on which its games were made available, including those owned by competitors like Nintendo and Sony.

Microsoft also understood that this massive deal would be met with intense regulatory scrutiny. And so it publicly stated that it did not expect it to close until the end of its fiscal 2023, or June 30, 2023. In the ensuing 18 months, Brazil, Chile, Japan (tellingly, Sony’s home country), Saudi Arabia, Serbia, South Africa, and Ukraine all approved the deal without qualification. But Microsoft met resistance from the two biggest regulatory bodies it faced, the U.S. Federal Trade Commission (FTC) and the European Union’s European Commission (EC), plus the UK CMA, each of which has been heavily lobbied by market leader Sony, which desperately wants to squash this deal to maintain its dominance.

There is no rational reason for any regulatory body to oppose this deal. But in a misplaced bid to show that the Biden administration is serious about curbing the power of Big Tech, the FTC sued to block the acquisition in December 2022, with the United States government deciding to prevent an American firm from acquiring another American firm in order to protect a dominant Japanese tech giant. In March, we learned that the EC was likely to approve the deal after Microsoft made concessions. And later in March, we learned that the UK CMA was also likely to approve the deal for the same reasons.

Just kidding.

On Wednesday, the UK CMA surprised everyone—Microsoft, its competitors, videogame players, and other onlookers—by announcing that it would block the acquisition. The problem? Microsoft’s concessions did address its concerns, but only for the videogame console market. What Microsoft did not address was the CMA’s concerns about the game streaming market, a market so small that it almost doesn’t exist. In other words, the UK is concerned about “what ifs” or “future crimes.” Which doesn’t make sense since Microsoft’s concessions could very easily be adapted to address this wannabe market too.

Mr. Smith’s resulting commentary on this decision is particularly biting and constitutes a clear threat to the United Kingdom, which withdrew from the EU three years ago and is thus no longer part of a major world economy. Where the EU economy is over $16 trillion annually, behind only the U.S. ($26 trillion) and China ($19 trillion), the UK economy is worth just $3.2 trillion and it has been struggling in the post-COVID world.

No, Microsoft won’t pull Xbox out of the UK. But it could cut its investments in the country at a time when the UK is increasingly an isolated also-ran. And that could have a devasting effect on the UK.

“I think it’s bad for Britain,” Smith said during a BBC interview. “The business community, the investment community, and the technology sector around the world have been following this case. And the strong message that the CMA has sent, is not just to surprise everyone who fully expected this acquisition to be approved, but to send a message that will discourage innovation and investment in the United Kingdom. And I think in that sense the impact of this decision is far broader than on Microsoft or this acquisition alone.”

“Microsoft has been in the United Kingdom for 40 years and we play a vital role, not just supporting businesses and non-profits but even defending the nation from cyber-security threats,” he continued. “But this decision, I have to say, is probably the darkest day in our four decades in Britain. It does more than shake our confidence in the future of the opportunity to grow a technology business in Britain than we’ve ever confronted before.”

“It’s all about a potential concern about what could become the cloud streaming of games, like you see the streaming of movies on a network like Netflix,” he said. “But this business is so small today, that Microsoft can’t even stream games to more than 5,000 people at a time in the entirety of the United Kingdom. So for regulators to step in and seek to torpedo a $68 billion global traction out of a concern of a part of the business that is so small, and to reject so many proposals to try and address their concern, it leaves people worried and it leaves people thinking that, actually, the process in Brussels [i.e. in the EU] worked far better than what we are now addressing in London.”

Oof.

There’s more.

“Investments flow to places where people have confidence in the way laws and regulations work, and for all of us who had some hope that post-Brexit the UK would construct a constructor that would be more flexible, better for investment, better for technology, we’re finding the opposite is true,” Mr. Smith continued. “What is most striking to me is that the English Channel has never seemed wider in terms of Europe as a continent being attractive to investment [and] Brussels being a place where one can sit down and have a conversation with the regulators who are accountable to the elected leaders. And the difference we now confront in London, where we have regulators who are not only unelected and unaccountable and now making decisions that are fundamentally unwise.”

“If the Government of the United Kingdom wants to bring in investment, if it wants to create jobs, and if it wants to make the United Kingdom a home where technology is not only going to flourish, but be creative, then it needs to look hard at the role of the CMA, this regulatory structure in the United Kingdom, this transaction and the message that the United Kingdom has just sent to the world. Because I can tell you, while I might have a point of view that is based in part on an interest our company has, I have heard from a great many around the world. People are shocked, people are disappointed and people’s confidence in technology in the United Kingdom has been severely shaken.”

It gets worse.

In the wake of the CMA decision, Microsoft signed its third 10-year deal to ensure that Xbox Cloud Gaming titles will be made available on a competing cloud streaming service, and its second with a European-based company. And NVIDIA, a Microsoft competitor in game streaming, and the third of those three new partners, tweeted an implicit condemnation of the CMA decision.

“[NVIDIA] GeForce NOW and other cloud gaming providers stand to gain an even deeper catalog of games if Microsoft’s acquisition of Activision is completed,” the firm noted. “We see this as a benefit to cloud gaming and hope for a positive resolution.”

And Boosteroid, the first of the two European game streaming firms, was even more explicit in its support for Microsoft.

“[The] Boosteroid team and our users disagree with the CMA’s decision against Microsoft’s purchase of Activision,” the company tweeted. “Our position on this issue is in line with that of Microsoft’s president, Brad Smith. We hope for a quick resolution to this question.”

Indeed, it’s impossible to find any meaningful support for the CMA decision. Even Sony, which has never been shy about inventing conspiracy theories, has kept its trap shut.

So what the hell went wrong? How could the CMA have gotten it so wrong?

We can only theorize. Looking back at its February provisional conclusion about the acquisition, we can see that the CMA raised two general issues at the time, one about consoles and one about cloud gaming. Everyone, including Microsoft, focused on the console angle, since that’s a large and established market, and Microsoft’s offer to supply Nintendo and Sony with Call of Duty and other key titles for 10 years met the concerns. But the cloud concerns went largely unnoticed. Because, again, the cloud streaming market is so small it’s in any way important and it will never replace existing game markets like consoles, PCs, or mobile devices.

“[The] merger could make Microsoft even stronger in cloud gaming, stifling competition in this growing market and harming UK gamers who cannot afford expensive consoles,” the CMA wrote at the time. ” Microsoft would find it commercially beneficial to make Activision’s games exclusive to its own cloud gaming service (or only available on other services under materially worse conditions). Microsoft already accounts for an estimated 60-70% of global cloud gaming services and also has other important strengths in cloud gaming from owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming).”

“The CMA provisionally found that buying one of the world’s most important game publishers would reinforce this strong position and substantially reduce the competition that Microsoft would otherwise face in the cloud gaming market in the UK. This could alter the future of gaming, potentially harming UK gamers, particularly those who cannot afford or do not want to buy an expensive gaming console or gaming PC.”

This bit is particularly clueless.

“Strong competition between Xbox and PlayStation has defined the console gaming market over the last 20 years. Exciting new developments in cloud gaming are giving gamers even more choice.”

Uh-huh. Sony PlayStation has dominated Microsoft Xbox in three of the four console generations in which each has competed against the other, and Sony has emerged victorious in all four generations. By preventing Microsoft from leveraging its expensively obtained cloud computing prowess, the CMA is simply allowing Sony to retain an unfair advantage in a market in which Microsoft, not Sony, has done the work needed to succeed. And that market is small, and it will remain small. It’s unclear if it can ever compete with console gaming from a revenue perspective. Ever.

Here’s the problem. While Sony has gone to incredible lengths to prevent this acquisition and is a far better example of industry abuse than Microsoft, its basic concerns about keeping Call of Duty and other popular game franchises on its consoles are sound and worth debating. And Microsoft has addressed those concerns by offering 10-year deals and by agreeing to terms that would be legally binding in multiple jurisdictions.

But the UK CMA’s cloud gaming concerns are fanciful and imagined, and that market is tiny. Worse, Microsoft could address those concerns in the same way they did Sony’s. And will, if given the chance.

And on that note, Microsoft will appeal.

But one wonders how this tiny backwater country, the Florida of Europe, could possibly hold sway over an entire planet. As Activision Blizzard noted in its own statement about the CMA decision, “We will reassess our growth plans for the UK. The UK is clearly closed for business.”

Closed, yes. But also closed-minded, small-minded, and wrong.

UPDATE: As many correctly pointed out, taking out my frustration on a country is unfair when what I’m really frustrated with is this regulatory body. To be as open and honest as possible, I won’t remove what I wrote above and you can judge me at my worst accordingly. But allow me to rephrase below in the clear light of morning how I really feel.

But one wonders how this tiny backwater agency, the Florida of regulatory bodies, could possibly hold sway over its own country, let alone an entire planet. As Activision Blizzard noted in its own statement about the CMA decision, “We will reassess our growth plans for the UK. The UK is clearly closed for business.”

Closed, yes. Thanks to the CMA. Which is also closed-minded, small-minded, and wrong.