UK Rejects Microsoft's $69 Billion Offer for Activision, Deal Killer for Tech

UK Rejects Microsoft's $69 Billion Offer for Activision, Deal Killer for Tech

Proponents of regulating digital companies, who have faced challenges in the United States, can celebrate a huge success with the decision prohibiting the takeover of a major video game publisher.

On Wednesday, British antitrust officials blocked Microsoft's $69 billion bid to acquire video game giant Activision Blizzard. This was a significant triumph for government enforcers who want to reign in Big Tech.

The Competition and Markets Authority dealt a potentially fatal blow to what would have been the largest consumer tech acquisition since AOL bought Time Warner two decades ago when it concluded that Microsoft's proposals to ensure the acquisition did not harm competition "failed to effectively address the concerns in the cloud gaming sector," a nascent part of the gaming industry.

Proponents of regulating digital companies like Microsoft, Amazon, Apple, Google, and Meta, the parent company of Facebook, were handed a major victory by the unexpected verdict. Fears that the businesses have too much control over internet commerce and communications have driven their efforts, but recent court losses and legislative failures in the United States have stalled those attempts.

According to William E. Kovacic, a former chairman of the Federal Trade Commission, "this is a very big win for the broader effort to realign antitrust enforcement." Microsoft has indicated it will file an appeal of the decision.

While much of the discussion surrounding the deal's potential impact on consumers centered on the market for expensive gaming consoles, the C.M.A.'s ruling centered on cloud gaming, a relatively new technology that allows people to stream games to their devices, obviating the need for hardware like gaming consoles.

The announcement by the British regulator gave credence to F.T.C. chair Lina Khan, who has made contesting mergers a fundamental plank of her strategy to rein in the internet titans. Microsoft quickly attempted to isolate Ms. Khan after the American government filed a lawsuit in December to halt the video game deal, by pushing British and European authorities to seek legal settlements that would address their concerns and allow the deal to go through. The EU's antitrust regulators are still looking over the transaction, and they are anticipated to make a decision by May 22.

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The British government, on the other hand, has indicated the end of a period of simple blockbuster agreements between computer companies. The F.T.C. is preparing an antitrust action against Amazon, and Ms. Khan has stated that she will be keeping a close eye on whether or not tech firms misuse their position of dominance in the race to develop AI capabilities.

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On Wednesday, the F.T.C. said that it was in agreement with its British counterpart. "We also have concerns, as explained in our complaint, about the anticompetitive effects of this deal," Holly Vedova, director of the agency's Bureau of Competition, said.

"We're especially disappointed that after lengthy deliberations, this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works," said Brad Smith, president of Microsoft.

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Publisher Activision, known for hits like Call of Duty, has pledged to "work aggressively" with Microsoft in an effort to overturn the decision.

"If the C.M.A.'s decision holds, it would stifle investment, competition, and job creation throughout the U.K. gaming industry," said Bobby Kotick, CEO of Activision.

In premarket trade, Activision's stock dropped by more than 10%. Microsoft's stock price rose by almost 8 percent on Tuesday after the company announced better-than-expected profits.

Microsoft's acquisition of Activision was announced in the first few months of 2016, with the goal of bringing together the company's Xbox platform and video game subscription service with Activision's popular titles including Call of Duty, World of Warcraft, and Candy Crush Saga.

Activision had recently been hit with a lawsuit in California alleging it had created a hostile and sexist work environment, and Mr. Kotick was under pressure to resign.

The hundreds of millions of people who play Activision's games have been at the focus of the debate over the deal for over a year. Sony, maker of the PlayStation console, a rival to Microsoft's Xbox, expressed the most opposition to the purchase. Sony said that gamers who presently have the option of playing Call of Duty and other Activision products on either the Xbox or PlayStation will be forced to utilize Microsoft's consoles and services.

When asked for comment on the verdict, Sony did not immediately answer.

Microsoft insisted it would not limit Call of Duty to Xbox and claimed the purchase would increase the number of people able to play the series. The arrangement was contingent on getting agreements with regulators in countries outside the United States. As further proof that it would not impose any kind of restriction on the widespread game, it promised that all gaming systems will have unrestricted access to Call of Duty.

In February, the British regulator warned that the acquisition would hamper competition for gaming consoles like the PlayStation and the emerging cloud gaming business, which uses faraway data centers to broadcast games to devices like iPhones and computers. After first saying the transaction represented a threat to Sony, the company changed its tune in late March, thus strengthening Microsoft's hand.

The C.M.A. has instead put its attention on the relatively new cloud gaming business, which it predicts will grow to be worth $1.3 billion in Britain and $14 billion globally by 2026.

The C.M.A. stated in its judgement on Wednesday that "the cloud allows U.K. gamers to avoid buying expensive gaming consoles and PCs and gives them much more flexibility and choice as to how they play." Allowing Microsoft to gain such a dominant position in the cloud gaming business at a time when the industry is experiencing explosive growth could stifle the type of creative thinking that is essential to seizing these prospects.

By allowing games to be streamed from faraway data centers, cloud gaming has the potential to free players from consoles in the future. Microsoft's Xbox Game Pass, a monthly game subscription service with over 25 million customers, may be a potent weapon if used together. However, widespread adoption has not yet occurred, and early ventures into cloud gaming by IT giants like Microsoft, Google, and Amazon have met with little success. The system still requires a stable Wi-Fi connection and frequently has bugs.

Australian financial services firm MST Financial senior analyst David Gibson said, "Cloud gaming longer term could be very big, but it would require a massive shift in how games are made and sold."

Microsoft has recently inked a slew of arrangements with cloud streaming platforms like Nvidia's GeForce Now, pledging to make Activision's games playable on those services for the next decade. The C.M.A., however, argued that these solutions did not adequately support all cloud business models.

According to the report, Microsoft has a commanding lead in the rapidly expanding cloud gaming market, providing between 60 and 70 percent of all cloud gaming services worldwide. The C.M.A. expressed concern that consumers would suffer as a result of Microsoft gaining exclusive rights to publish Activision's games on the Xbox Cloud Gaming platform.

"This deal would strengthen that advantage giving it the ability to undermine new and innovative competitors," said Martin Coleman, chair of a team that investigated for the C.M.A.

Microsoft will have to take the matter to court after this setback. The company has stated that it anticipates completing the acquisition by July 18.

The appeals process is likely to be quick, but Microsoft will have to clear a high bar: according to Pablo Ibáez Colomo, a professor of law at the London School of Economics, the tribunal that oversees appeals looks primarily at whether the C.M.A.'s ruling was reached lawfully and reasonably.

"This is a significant blow to the deal completing," said Piers Harding-Rolls, a gaming researcher at the London analytics firm Ampere Analysis. This will cause a delay and affect Xbox's business goals, for sure.

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