The Reason Regulators Blocked Microsoft’s Activision Deal Makes No Sense

Gaming

Products You May Like

Microsoft presents Game Pass on stage at E3 2019.

The UK’s Competition and Markets Authority (CMA) potentially torpedoed the biggest tech acquisition in history this week and hardly anyone understands why. There are plenty of reasons to prevent a giant corporation from trying to buy huge competitive advantages just because it can flood the zone with $69 billion in cash on hand. But the regulators’ final decision to do so ended up coming down to the one thing nobody much cared about: cloud gaming.

Cloud gaming wasn’t high up on anyone’s radar mostly because very few people use it, and it’s still a very poor substitute for playing games on a local console or PC. “Small and bad” isn’t normally where you’d expect antitrust regulators to focus their attention, but that’s the part that’s now ground the deal to a halt and, in the eyes of some analysts, possibly doomed it altogether.

Advertisement

To be clear, I have no personal stake in the outcome of Microsoft’s $69 billion gamble. I play my Xbox Series S in the morning, my Switch at lunch, my PS5 at night, and spend the rest of my waking hours glued to a PC and mobile device. There will be new games and news to cover either way. I’m just baffled, is all.

The announcement came as a shock in part because, in public at least, the months-long debate around the deal seemed to be entirely about whether Microsoft would end up making Call of Duty an Xbox exclusive or not. Sony said it would, or that Microsoft would at least make any PlayStation versions much worse. Microsoft claimed it wouldn’t monopolize Call of Duty, and offered a 10-year agreement promising as much. The CMA ultimately sided with Microsoft in March, provisionally concluding there wasn’t an economic incentive for the company to deny the smash-hit shooter series to rival platforms.

Advertisement

Regulators fear Microsoft will crush cloud gaming competitors

A month later, the CMA decided that cloud gaming is the real threat, and laid out its reasoning in the second half of an over-400-page final report. Its argument is broad and multifaceted, but the gist goes something like this: Cloud gaming is going to be huge, Microsoft is already dominating in it, and the marketplace could be irrevocably sabotaged if Microsoft decided to make Call of Duty or World of Warcraft exclusive to its streaming service. “We therefore believe that the Merger may be expected to result in a substantial lessening of competition in the market for the supply of cloud gaming services in the UK,” the regulators wrote.

Advertisement

What’s so weird about this line of thinking is that it basically takes the very issue the CMA said wasn’t an issue for consoles—Microsoft potentially making Activision’s games Xbox exclusives—and says it would be crippling for cloud gaming. Microsoft would lose out on a ton of money if it ripped Call of Duty away from PS5 players, but would suffer no real consequences for refusing to make it widely available on competing cloud gaming startups, increasing the likelihood and danger of it doing precisely that. So goes the CMA’s thinking, at least.

Advertisement

It’s not completely delusional. In the recent past, regulators greenlit mergers that ended up being disastrous, so they have good reasons to be more skeptical now. As Bloomberg reported earlier this week, the Federal Trade Commission was criticized for its failure to foresee the impact of letting Facebook buy Instagram. “Regulators more often focus on deals that threaten competition in mature, developed markets,” it wrote. “But the UK action Wednesday reflects a growing emphasis on deals that could impede rivalry in the future.”

At the same time, the CMA’s analysis of cloud gaming relies heavily on prognostication and speculation, and appears to fundamentally misunderstand it in some important ways. In one section, the regulators try to measure the likelihood that cloud streaming platforms could leverage network effects to create walled-off gardens. If Microsoft’s xCloud is the only place to stream Overwatch 2, Diablo IV, and Call of Duty: Warzone 2.0, won’t it create a cascading series of incentives that make it all but impossible for other entities to compete and provide streaming services of their own?

Advertisement

While it’s impossible to say, that’s certainly not what’s happened in television and movies, where we are drowning in subscriptions for all different types of content. I get Premier League on Peacock, Star Trek on Paramount+, Star Wars on Disney+, Succession on HBO Max, and Curious George on Hulu (the kids want what the kids want). It costs a ton and it sucks actually, but Netflix, while dominant, has hardly stayed the only game in town.

Cloud gaming isn’t a console war

Cloud gaming is of course way more complex, and the CMA rightfully points to Microsoft’s advantages in owning a bunch of the technology and infrastructure as a big challenge for competitors like Nvidia and Sony. That all seems baked into the market at this point, though. Why is Microsoft allowed to own Windows and huge data centers and make computers? I have no idea, but the ship sailed on that one. Whether people aren’t going to subscribe to PS Plus to stream Spider-Man because they are already paying for Game Pass to stream Modern Warfare II seems like a completely separate question.

Advertisement

It also elides the central point that hardly anyone is paying to subscribe to cloud gaming services right now. Google abandoned Stadia for this very reason. Sony folded PS Now into PS Plus. Nvidia GeForce Now is cool and also still extremely niche (though most importantly is competing on tech rather than content). xCloud is the market leader not because people want to stream Halo Infinite but because it comes free with a Game Pass subscription that you can use to play Starfield on day one on a physical Xbox where it will actually work.

In the end, the CMA seems to be treating cloud gaming like an extension of the console wars, with one platform’s market share coming at the expense of another’s. It seems to be worried less about the technical side of the cloud gaming market, which revolves around software and server racks, than subscriptions like Game Pass that can gain enough critical mass to overwhelm competing services through brute force.

Advertisement

But the thing with content is you can always make more of it, and you never quite know where the next hit is going to come from. Activision Blizzard only made one of the games on the top-10 best sellers list last year, and it wasn’t even number one in the UK. It’s too early to tell if Microsoft and Activision’s appeal of the CMA’s decision will be successful, or happen quickly enough to salvage the deal. For now it’s hard to see the outcome having a huge impact on the future of cloud gaming either way, at least in the U.S. where the internet it’s provided on remains hopelessly broken.

           

Products You May Like

Articles You May Like

Worried About Inflation? 93% of Americans Are, Too, CNET Survey Finds – CNET
How to Watch Euro 2024: Spain vs. Croatia Livestream Soccer From Anywhere – CNET
Mediacom Internet Review: Plans, Pricing, Speed and Availability Compared – CNET
I Lost Nearly $1K by Renting a Router From My Internet Provider. Here’s What I Learned – CNET
Here’s everything Apple announced at the WWDC 2024 keynote, including Apple Intelligence, Siri makeover

Leave a Reply

Your email address will not be published. Required fields are marked *