Microsoft Offers the CMA New Evidence, Not New Compromises (Premium)

Microsoft provided the UK CMA with a list of “material changes” that have occurred since the agency ruled against the Activision Blizzard acquisition. And while many were expecting additional compromises from the software giant, that’s not what happened. Instead, Microsoft argues that additional evidence unearthed since the original CMA decision, mostly during its hearings with the U.S. Federal Trade Commission (FTC), completely undermines the CMA’s position. Ergo, a new decision is warranted.

One has to think the software giant is tired of the charade. It is notable that the only two regulatory bodies that blocked Microsoft’s acquisition of Activision Blizzard both had non-sensical rationales for doing so. And while we might argue that regulators from both agencies, the U.S. Federal Trade Commission (FTC) and CMA, were equally delusional in believing that their illogical arguments against the merger would withstand any scrutiny, the CMA’s is particularly fanciful. It posits an imaginary future in which cloud-streamed gaming somehow becomes a major market unto itself. And in the context of this fever dream that Microsoft, an also-ran in the video game market today, might somehow commit future crimes like those in the book and movie Minority Report as part of a dastardly plot to dominate a business in which it has never been successful or profitable.

We all love come-from-behind stories. But as regulators from the European Union (EU) acknowledged, and as a simple reading of the facts reveals to any interested party, Microsoft has been nothing but upfront about its desire to do with Xbox what it did previously with Microsoft 365 and meet its customers where they are. And in this case, that means—explicitly—keeping (or bringing) Call of Duty and other key Activision Blizzard titles on its competitor’s consoles and bringing games from its subscription and cloud streaming offerings to its competitors in those markets as well. The lengthy cascade of partnership deals it orchestrated in the wake of its acquisition announcement stands as the factual reality in the face of the CMA’s invented fantasy. It’s one thing to say you’ll do something, but Microsoft has put action to words.

Anyway. Here we are. The CMA, after a comical series of backtracking and face-saving, is taking the rare if not unprecedented step of reevaluating its “final” decision, engaging in what we might call “regulatory theater” by pretending to do its job by belatedly considering concessions it should have entertained before saying no to Microsoft, concessions that Microsoft said it would make almost one year ago, in September 2022. The resulting fake hustle requires the CMA to seek public feedback on the deal—feedback it received and ignored last year when gamers, PS5 owners, and UK-based game streaming services all told the agency that they approved of this deal—over a period of just a few days, and to save face by pretending to wrangle additional concessions out of Microsoft that would protect Xbox and non-Xbox gamers alike and ensure that the UK’s nascent cloud gaming market will never be disrupted by outsiders.

Or something.

In keeping with its legal requirements, the CMA on Monday published a 34-page Microsoft filing detailing “material changes” that have occurred in this case since the initial CMA decision. To be clear, there are no new concessions, just new evidence. Indeed, this report gives us tremendous insight into the lengths Microsoft went to satisfy the CMA, both before and after the agency’s so-called final decision. So let’s dive in and examine the key points in this report.

Microsoft’s deals with cloud gaming services are now legally enforceable. As noted above, Microsoft partnered with several cloud gaming services that are based in or do business in the UK—it names NVIDIA, Boosteroid, Ubitus, and Nware—but the CMA argued that “it had no assurance that Microsoft would not break, terminate, or renegotiate” those agreements in an example of my future crime allegation. But now Microsoft can point to its settlement with a more credible regulatory body, the European Commission (EC), which did what the CMA should have done and required any changes to those agreements to face regulatory approval. These “commitments impose severe penalties for breach,” Microsoft notes, and they “constitute a material change of circumstance, as well as a special reason for reaching a different decision.” They cannot be “broken, terminated or renegotiated without very significant regulatory consequences for Microsoft.” In other words, the problem is solved: Microsoft cannot screw its cloud partners with a presence in the UK (or EU) even if it wants to.

The CMA’s concerns about Microsoft foreclosing Call of Duty were never defensible. Like the FTC, the CMA nonsensically claimed that Microsoft could stop selling Call of Duty on the rival PlayStation console. Microsoft argued otherwise, and the EU, every other regulatory body on earth, and a U.S. circuit court judge all agreed with the software giant that doing so would be economic suicide. But now Microsoft can point to yet another bit of inconvenient truth: in the wake of the FTC defeat Sony “entered into an extended agreement” with Microsoft to keep Call of Duty on PlayStation. Case closed.

Market definition. In This is What Matters in the EU Antitrust Case Against Microsoft Teams (Premium), I discussed how antitrust regulators can narrow or broaden their definition of a “market” to prove the case. And that’s exactly what happened with the CMA and Microsoft/Activision Blizzard: the CMA tried to define cloud-based gaming (streaming) as its own market, thereby making Microsoft’s investments in this space seem more predatory, especially with regard to potential future crimes. But now Microsoft notes that evidence that was uncovered in the FTC’s failed hearing undermines the CMA’s original decision. An analysis of the new material from the FTC case “shows that there were significant pieces of evidence which were not taken into account in the evidential assessment in the [CMA decision], in particular regarding market definition and ability to foreclose,” Microsoft writes. “These materials clearly support the conclusions that the [CMA’s original] findings on market definition and/or ability could not be sustained.” More on this below.

Microsoft and Activision Blizzard have renegotiated the merger. Thanks to tactical delays by the FTC and CMA, Microsoft couldn’t consummate its acquisition of Activision Blizzard in time to meet the originally agreed upon July 18 final date. However, both firms agreed to extend the final date for the acquisition to accommodate the regulators, and in doing so, Microsoft also agreed to up its no-deal breakup fee from $3 billion to $4.5 billion. This one is what I call a legal fine line, but basically, the argument is that the new agreement is in effect a new acquisition, and that, under the CMA’s own rules, the CMA’s original decision is for an acquisition that is no longer happening. “A Final Order which had the effect of prohibiting or qualifying the completion of the [acquisition] would be plainly unjustified,” Microsoft claims.

The filing then descends into a series of legal explanations for why it’s not only right that the CMA should reconsider its so-called final decision on Microsoft/Activision Blizzard, but that not doing so would be unconscionable. But then it expands into detailed arguments for why each of the above-listed changes is material and should trigger a CMA approval of the acquisition. Microsoft’s arguments about its cloud streaming partnerships and the Sony agreement are straightforward. Likewise, the bizarre Sony/FTC claim, now debunked, that Call of Duty is somehow special among AAA titles, gets an airing. But I’m most interested in the market definition bit, as this is a key tenet of antitrust and will come up in each Big Tech antitrust case in the future.

And on that note, Microsoft entered the following evidence to undercut the CMA’s narrow definition of cloud streaming as a market of its own, now or in the future.

Stadia specifically competed against consoles and PCs. Google’s now-defunct Stadia gaming service didn’t exist to compete with other cloud services, it was specifically positioned as an alternative to console and PC games. “The existing console and PC gaming participants were … who we were competing with,” former Stadia product director Dov Zimring testified during Microsoft’s FTC hearings. He said that Xbox, PlayStation, Steam, and Epic Games were all director competitors. “Google unequivocally viewed native gaming as a competitive constraint on cloud gaming, which is contrary to the [CMA’s] market definition assessment,” Microsoft notes.

NVIDIA and Sony agreed that cloud streaming was not its own market. An NVIDIA executive agreed with the Stadia assessment during the FTC hearings, while Sony’s Jim Ryan, an outspoken critic of the acquisition, acknowledged that cloud streaming was “a service component” of his firm’s current gaming platform. Ryan added that it was “difficult to determine” when or if cloud gaming would ever be a standalone offering. “Three of the largest players who operate (or have operated) in cloud gaming spelled out clear evidence in support of Microsoft’s wider market definition,” Microsoft explains. “If the relevant market were to be found (correctly) to be wider than cloud gaming, that would fundamentally reshape the analysis in the [CMA decision], in particular in relation to ability and incentive to foreclose.”

Game streaming is expensive and unprofitable. Addressing the massive investments it’s made in cloud streaming and the lack of success it’s had in the market so far, Microsoft noted that “the US courts also confirmed that the cost of streaming to Microsoft was higher than the revenue it gained from streaming. “None of this evidence was included in the [CMA decision] … Had the CMA had this material before it and taken it into account, it manifestly should have reached different decisions on the key issues.”

And that’s it. The CMA ruling was flawed the day it was issued, a paraphrased version of the Microsoft argument goes, but in the wake of more recent developments, it’s even more wrong-headed.

“For the reasons outlined above, each and all of the matters set out clearly warrant reconsideration and departure from the key findings and remedial conclusions in the [original CMA decision],” Microsoft concludes.

This filing is good reading. I recommend checking it out.