Microsoft and Activision Blizzard, which are looking to finalize the $68.7 billion merger of the two companies, have put a lot of effort into appeasing regulators on the Call of Duty issue. If approved, the deal would bring one of the largest gaming franchises under the already thriving Xbox ecosystem. Regulators and rival platform holders – namely Sony, which has aggressively lobbied global governments in an effort to stop the acquisition – have been concerned about the potential for console exclusivity that would stifle competition. British regulators at the end of March seemingly brushed aside the issue of potential Call of Duty exclusivity in what originally appeared to be a tipping point in favor of the deal.
And so it surprised onlookers when Britain’s antitrust regulator, the Competition and Markets Authority, blocked the deal on April 26, citing concerns about its impact on the cloud gaming market. The CMA’s concerns about cloud gaming are not new. The supervisor has outlined them in its report of preliminary findings from earlier this year, but public attention remained squarely on Microsoft potentially making Call of Duty games exclusive to Xbox. Cloud gaming is indeed a relatively young market, but its impact goes beyond what games you can stream to your phone via Game Pass. The big picture of cloud gaming encompasses everything about how information is stored, stored, distributed and accessed.
Cloud gaming is considered an emerging market in a formative period that will determine how the new technology will be adopted by players. Companies have been toying with cloud gaming for over 20 years, but the technology hasn’t progressed far enough to bring it to a wider audience — at least until recently. UK regulators have positioned cloud gaming as a way to make gaming more accessible, keep consumers away from expensive, high-end hardware and keep technology-intensive video games running on devices people already have access to, such as phones or laptops. (Apart from what UK regulators believe, the technology is do have that potential.)
Nvidia’s GeForce Now service, which debuted in North America in 2014 with limited capacity, is one of the first forays into cloud gaming. Microsoft, Google, and Amazon all followed suit with their own cloud streaming initiatives. With Google Stadia’s attempt to take over the market failed and Amazon’s Luna platform still niche, Microsoft has dominated the market by using cloud gaming as a small but important feature of its Game Pass subscription service, which offers customers gives access to hundreds of games for a monthly fee. Many of those games are available to play in the cloud. (Amazon, meanwhile, has a huge stake and dominance in cloud services through its Amazon Web Services division.) UK regulators estimate Microsoft has a 60-70% grasp of the global cloud gaming market, saying the company has “other key strengths in cloud gaming by owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming).
The merger with Activision Blizzard would give Microsoft more control over the market and how its popular games are played, such as Call of Duty, Overwatch and World of Warcraftthe CMA said — and potentially allows the company to exercise exclusivity rights on streaming platforms.
Microsoft can leverage the power of its Azure infrastructure to support Xbox Cloud Gaming; Bloomberg reported this in December that Microsoft owns “more than 200 data centers” specific to Azure, “supporting the lower latency cloud gaming services for its range of titles on Game Pass.” Sony, whose market position has come under scrutiny from regulators, lags far behind Microsoft in how it supports its own subscription service, PlayStation Plus. While PlayStation Plus gives subscribers access to cloud gaming, the offerings are skimpy compared to Game Pass’s streaming options.
“The cloud means that gamers in the UK do not have to buy expensive games consoles and PCs and have much more flexibility and choice in how they play,” the CMA wrote. “Allowing Microsoft to take such a strong foothold in the cloud gaming market at a time when it begins to grow rapidly would risk undermining the innovation critical to the development of these opportunities.”
Microsoft tried to address these concerns by making a deal with Nvidia to bring Microsoft’s PC games to GeForce Now. (The company signed similar deals with smaller cloud gaming services like Boosteroid And ubitus.) Activision Blizzard’s games will also be included should the merger go ahead. Nvidia had previously expressed concerns about the merger, citing the hindrance of competition. The 10-year deal between Microsoft and Nvidia seems to allay that concern, at least for Nvidia – but perhaps not UK regulators – as Activision Blizzard games would seemingly continue to be available on GeForce Now. Microsoft cited this agreement in its response to the CMA’s preliminary findings in March, calling the concerns “misguided.”
Joost Rietveld, Associate Professor of Strategy and Entrepreneurship at University College London School of Management, filed a public response following the CMA’s revised findings in March, in which it attempted to define cloud gaming, specifically whether it is a “separate market”. Rietveld argued that cloud streaming has four distinct services: “as a function”, “as a platform”, “as a complement”, and “as an input”. Each is a “different scope,” he said, and all categories “probably don’t compete.” (Some may compete, such as the potential use of cloud gaming “as a feature” and “as a platform.” Sony and Microsoft, with PlayStation Plus and Game Pass respectively, do compete in the “as a feature” category, judging by the descriptions van Rietveld.) Rietveld concluded that cloud gaming cannot be collapsed into a single market definition, nor should the CMA view it as such. It seems the CMA disagreed.
Shortly after the CMA released its decision, Microsoft and Activision Blizzard both pledged to appeal the decision. Microsoft president Brad Smith accused the CMA of having “a lack of understanding of this market and the way the relevant cloud technology really works.” An Activision Blizzard spokesperson added: “The report’s conclusions are a disservice to British citizens, who face a deteriorating economic outlook. We will reassess our growth plans for the UK Global innovators big and small will take note that – despite all the rhetoric – the UK is clearly closed for business.”
Microsoft and Activision are still awaiting a decision from the US Federal Trade Commission, which filed a lawsuit to block the deal. The FTC, like the CMA, is concerned about Microsoft’s established dominance in the cloud gaming sector and how Blizzard’s acquisition of Activision, with its vast library of popular games, would affect the market. In March, the FTC filed a motion looking for documents related to Microsoft’s cloud gaming business.