UK Regulator Blocks Microsoft’s $68.7 Billion Activision Blizzard Acquisition

Microsoft president Brad Smith said the tech giant remains “fully committed to the acquisition and will appeal”

Signage is seen at The Ultimate Fan Experience, Call Of Duty XP 2016, presented by Activision, at The Forum on September 3, 2016 in Inglewood, California. (Photo by Rich Polk/Getty Images for Activision)

Britain’s Competition and Markets Authority (CMA) has blocked Microsoft’s $68.7 billion acquisition of Activision Blizzard after publishing its final findings on Wednesday.

The regulator, which initially launched an in-depth review of the deal in September, provisionally determined in February that the merger could make the tech giant even stronger in cloud gaming, stifling market competition.

In its final decision, the CMA determined that Microsoft would “find it commercially beneficial to make Activision’s games exclusive to its own cloud gaming service” and that the deal would “reinforce Microsoft’s advantage in the market by giving it control over important gaming content such as Call of Duty, Overwatch, and World of Warcraft.”

“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,” the CMA said.

An Activision Blizzard spokesperson told TheWrap that the CMA’s report “contradicts the ambitions of the UK to become an attractive country to build technology businesses.”

“We will work aggressively with Microsoft to reverse this on appeal. The report’s conclusions are a disservice to UK citizens, who face increasingly dire economic prospects,” the spokesperson added. “We will reassess our growth plans for the UK. Global innovators large and small will take note that – despite all its rhetoric – the UK is clearly closed for business.”

According to the CMA, Microsoft already accounts for an estimated 60-70% of global cloud gaming services and 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 cloud allows UK gamers to avoid buying expensive gaming consoles and PCs and gives them much more flexibility and choice as to how they play,” the CMA said. “Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities.”

Microsoft submitted a proposal to address some of the CMA’s concerns, which involved setting requirements governing what games must be offered by the company to other platforms and on what conditions over a 10-year period.

However, the CMA said that the proposal did not sufficiently cover different cloud gaming service business models, including multigame subscription services, and was not sufficiently open to providers who might wish to offer versions of games on PC operating systems other than Windows and would standardize the terms and conditions on which games are available, as opposed to them being determined by “the dynamism and creativity of competition in the market.”

“Given the remedy applies only to a defined set of Activision games, which can be streamed only in a defined set of cloud gaming services, provided they are purchased in a defined set of online stores, there are significant risks of disagreement and conflict between Microsoft and cloud gaming service providers, particularly over a ten-year period in a rapidly changing market,” the CMA wrote. “Accepting Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA. By contrast, preventing the merger would effectively allow market forces to continue to operate and shape the development of cloud gaming without this regulatory intervention.”

In a statement shared to Twitter, Microsoft president and vice chair Brad Smith added that the CMA’s decision “rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom.”

“We have already signed contracts to make Activision Blizzard’s popular games available on 150 million more devices, and we remain committed to reinforcing these agreements through regulatory remedies,” Smith added. “We’re especially disappointed that after lengthy deliberations, the decision appears to reflect a flawed understanding of this market and the way relevant cloud technology actually works.”

The CMA’s decision comes after the Federal Trade Commission sued to block the merger in December.

The agency has alleged that the Activision Blizzard acquisition would allow Microsoft to “suppress competition from rival consoles” and cited its acquisition of Bethesda, the game developer behind the “Elder Scrolls” series, as an example of how the company has previously made franchises that fall under its ownership into exclusive titles.

“Microsoft decided to make several of Bethesda’s titles including Starfield and Redfall Microsoft exclusives despite assurances it had given to European antitrust authorities that it had no incentive to withhold games from rival consoles,” the FTC wrote at the time.

Shares of Activision Blizzard have plunged over 8% on Wednesday, while Microsoft shares have climbed nearly 7%.