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The UK competition regulator has blocked Microsoft’s $75bn acquisition of Activision Blizzard, drawing a furious response from the video games maker, which branded Britain “clearly closed for business”.
The Competition and Markets Authority on Wednesday delivered a potentially fatal blow to Microsoft’s biggest deal by concluding the software giant could make Activision’s games exclusive to its own cloud gaming service.
Activision, maker of the hit game Call of Duty, said the ruling “contradicts the ambitions of the UK to become an attractive country to build technology businesses”. It labelled the decision a “disservice to UK citizens, who face increasingly dire economic prospects”, adding, “the UK is clearly closed for business”.
In an email to employees on Wednesday, Activision chief executive Bobby Kotick vowed to fight to conclude the deal and said the CMA decision was “far from the final word”.
Brad Smith, Microsoft vice-chair and president, said his group “remains fully committed to this acquisition and will appeal”, warning that the decision “discourages technology innovation and investment in the United Kingdom”.
Activision’s shares fell 11 per cent on Wednesday following the news. The company sought to counter disappointment on Wall Street by pre-releasing quarterly earnings that showed its strong sales at the end of 2022 had continued through the first months of this year.
With the latest edition of Call of Duty underpinning sales, Activision’s revenue jumped 35 per cent to $2.38bn in the first quarter, while pro-forma earnings per share climbed 70 per cent, to $1.09. Analysts had been expecting revenue of $1.8bn and pro-forma earnings per share of 52 cents.
If it goes through, the deal will make Microsoft the third-biggest gaming company by revenue, behind China’s Tencent and Japan’s Sony. Microsoft will have to pay a break fee of as much as $3bn if it falls apart.
Smith added that the CMA’s decision reflected “a flawed understanding of this market and the way the relevant cloud technology actually works”.
The ruling is a huge blow to the deal’s global prospects and comes ahead of regulatory decisions in the EU and the US, with the Federal Trade Commission suing to block it last year.
It comes just a month after the CMA retreated from a key concern, in a step that had appeared to improve the chances of the deal concluding.
The companies had hoped to reassure the CMA that licensing deals signed with cloud gaming platforms would be sufficient to appease the watchdog. Microsoft had proposed a solution that set out what games it would offer to which platforms and on what conditions over a 10-year period.
However, in an update on Wednesday, the regulator said that solution contained “significant shortcomings” considering the fast-moving nature of the cloud gaming market.
The CMA said Microsoft, which accounts for about 60 to 70 per cent of cloud gaming services, would gain control over games such as Call of Duty, Overwatch and World of Warcraft.
It said Activision would have started providing games on cloud gaming services without the Microsoft merger — something Activision has always denied. The developer has previously been reluctant to license its franchises to subscription services, and told the UK regulator it was sceptical of that market.
During the investigation, Microsoft struck 10-year licensing deals with streaming services including Nvidia’s GeForce Now service and Boosteroid, as well as pledging to bring Call of Duty to Nintendo’s Switch, in an attempt to prove that owning Activision would expand the availability of the company’s games, rather than restrict them.
One shareholder in Activision told the Financial Times that Microsoft would “surely use every avenue to fight, but at the end of the day, this deal is dead already. It’s a zombie-deal now.”
The FTC, which filed to block the deal in December, said owning Activision’s games could help Microsoft dominate the nascent cloud gaming market in the same way Netflix did for video streaming.
A decision is expected next month from regulators in Brussels. So far European Commission officials have been more willing to accept concessions to clear the deal.
In a joint statement, CMA chief executive Sarah Cardell and chair Marcus Bokkerink said: “The UK’s system of merger control ensures that the vast majority of deals can proceed, whilst requiring the CMA to step in to prevent the handful of problematic deals that we identify. Our approach is proportionate.”
The CMA had provisionally raised concerns in relation to both the cloud gaming market and in the market for games consoles. PlayStation owner Sony, the console market leader, has consistently warned it would be disadvantaged if Microsoft limited availability of one of the industry’s most popular titles.
However, the regulator changed its mind about the risk to the console market after Microsoft highlighted what it said were errors in the CMA’s financial modelling. In its amended provisional findings last month, the CMA said it no longer believed Microsoft had a financial incentive to cut off console rivals’ access to Call of Duty, which has brought in more than $30bn in revenue for Activision over its lifetime.
Additional reporting by Javier Espinoza in Brussels and Arash Massoudi in London
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