It's time to kill Microsoft's Activision Blizzard deal

In the latter half of 2021, Activision Blizzard and its CEO Bobby Kotick were mired in scandal and Microsoft saw an opportunity. The tech conglomerate, with a major foothold in games through its Xbox brand, swooped in to negotiate a $68.7 billion acquisition that wouldn’t just be the biggest in the history of the video game industry, but one of the largest in entire tech industry. The problem was getting it past regulators, and now, after more than a year of making the case for why it should be approved, the deal is in jeopardy.

The UK’s Competition and Markets Authority (CMA) has long been seen as the most difficult competition regulator to get the deal past, but a few weeks ago it released revised findings that were perceived as a suggestion it was going to be approved. The optimism Microsoft and Activision Blizzard’s executive leadership might have had over that release was dashed this morning when the CMA announced it would still block the deal.

The problem with the deal has always been how it would enhance Microsoft’s market power across the games industry. By absorbing a major third-party game maker that typically releases games across many platforms, it would reduce the ability for Microsoft’s competitors to compete because they’d be denied major titles made by Activision Blizzard studios, most notably the Call of Duty franchise. The problem wasn’t just in the console space, where Microsoft’s Xbox tends to be outmatched by Sony’s Playstation, but also in the nascent subscription and cloud gaming spaces.

The CMA’s decision is less due to the potential implications for the console business, where Microsoft has been making deals to demonstrate it would still make many Activision Blizzard titles multi-platform. Instead, its concern focused on what it would mean for cloud gaming, where Microsoft already has an advantage through its Xbox Game Pass subscription service and its Cloud Gaming service. The panel’s independent chair Martin Coleman concluded, “Microsoft already enjoys a powerful position and head start over other competitors in cloud gaming and this deal would strengthen that advantage giving it the ability to undermine new and innovative competitors.”

In recent months, Microsoft has signed deals with cloud gaming providers like Boosteroid, Ubitus, and Nvidia aimed at showing Activision Blizzard games will be allowed on other services if the deal is approved. But they were deceptive deals that didn’t address the scope of the CMA’s concerns because those services only allow gamers to play games they already own in the cloud — none of them have a subscription offering like Game Pass that also gives players access to a massive library of games, which is the model Microsoft is ultimately trying to cement as the industry’s future. As Gameindustry.biz’s Rob Fahey explained about those deals in February, “it is not a concession that in any way assuages concerns about Game Pass' potential dominance of the game subscription market.”

Consolidation in the games industry

Over the past ten years, we’ve seen how the rollout of the streaming model has proceeded in the film and television space: Netflix arrived on scene with deep pockets filled with tech VC cash, forcing the rest of the industry to readjust and consolidate in order to compete, only to create an offering that is less lucrative than the model that existed before and continues to get less appealing to consumers. Years later, Microsoft has embarked on a similar effort in the games industry, using profits from its other endeavors to finance a transformation that restructures how people access games to privilege itself, and which few of its competitors have the cash to follow.

As the shift to game streaming and subscriptions has accelerated, so has the move to consolidate. The Activision Blizzard deal may be the most visible of these efforts, but it’s far from the only one. Since the launch of Game Pass in 2017, Microsoft has acquired Ninja Theory, Undead Labs, Compulsion Games, Playground Games, inXile Entertainment, Obsidian Entertainment, Double Fine Productions, and ZeniMax Media, which controls Elder Scrolls-maker Bethesda Studios. All of these acquisitions were targeted at bolstering Xbox’s internal studios so it could entice more Game Pass subscriptions with a more attractive library, in some cases by making those titles exclusive to its platforms.

As Microsoft’s biggest competitor in the console space, Sony had to follow suit, but its pockets aren’t nearly as deep. Consider that Sony’s market cap is $114 billion, less than twice the value of the entire Activision Blizzard deal, while Microsoft’s stands at $2.2 trillion. Thus, to try to remain competitive, Sony has bought more studios, but often smaller ones: Insomniac Games, Housemarque, Nixxes Software, Firesprite, Fabrik Games, Bluepoint Games, Valkyrie Entertainment, Haven Studios, Bungie, Savage Game Studios, and Firewalk Studios. Reports also suggest its acquisition budget is virtually exhausted.

Ultimately, Microsoft is pushing the entire industry toward greater consolidation and expanded corporate power where it’s in a more privileged position than it’s been in the past. But that consolidation and the pressures of the streaming model are likely to result in less diverse offerings for gamers. When I spoke to Waypoint senior editor Rob Zacny about the potential consequences of Microsoft’s Activision Blizzard acquisition in the weeks after it was announced, he was quite clear about the direction things were heading.

What does a victory for Game Pass on Microsoft look like? It starts to look a lot like Microsoft is the market maker. Through Game Pass, they are the ones that decide: Well, what do we even put in front of gamers because they’re no longer looking? They’re no longer browsing store shelves at Walmart. They’re not delving deeply into Steam new releases lists. Why would you? That storefront is chaos. Microsoft ends up being in this really privileged position. Through Game Pass, they can set the menu for gamers. Anyone involved in making games has to start factoring that in. Right now, the deal is very good because Microsoft is happy to run this at a loss to get more people on board with the system. In 10 years, we already see Netflix raises its rates annually, twice annually. What’s going to happen in terms of that subscription fee? What’s gonna happen in terms of what’s offered on the service and what kind of deals are the people making games getting?

We’re already seeing the effects of moving in this direction with the increasing focus on large, open-world games filled with microtransactions, building off the lucrative model of free-to-play mobile games, and how they’re displacing single-player games because they can be far more profitable if they’re successful. Zacny explained to me how the industry, and Microsoft in particular, have been pushing toward a future where players lose ownership of their games for years. It was part of Microsoft’s failed vision for the Xbox One in 2013, but reemerged in a more attractive form with Game Pass, and that won’t be good for gamers.

The track we are on is a little closer to that Spotify model, where if you’re playing games in 10 years, and say largely happening through Game Pass in some form or another, chances are you’ll be playing a lot of shooters that look an awful lot like what you have today, probably with more in-app purchases. … This is what every game turns into now: stay in our ecosystem, buy the little tchotchkes in our theme park. I think with greater consolidation, you will see even fewer offerings in that space because why compete with one another? Why build products that compete with yourself? I think in terms of the diversity of offering, you would see it decline, and a lot of people would be discouraged from coming in because the barrier to entry is high, and the odds of success are low. Even if you manage to break in, increasingly, you have to do business with a few incumbents, a few major stakeholders. I think the track we’re on is probably pretty bad over time because it accelerates a lot of the trends we’ve already seen, embodied by Activision over the years. Now, it weds that to the cash cow nature of platform capitalism.

There’s no denying that the development of the video game industry has long been shaped by capitalist forces, but there seems to be a growing recognition that the direction of travel of the wider entertainment industry over the past decade or so as it’s been reshaped to serve the needs of the tech industry has been degrading the quality of culture, and acting against the interests of artists and the public. It’s hard not to see Microsoft’s effort to restructure the games industry as part of that broader trend, and the massive consolidation it’s pushing should be stopped.

Is the deal dead?

With the CMA’s decision, Microsoft’s acquisition of Activision Blizzard faces a tough path forward. The companies are appealing the decision, but it isn’t clear how they will be able to address the regulator’s concerns over how the deal would enhance its dominance of the growing cloud and subscription gaming sectors.

The US Federal Trade Commission (FTC) has already launched a lawsuit to block the deal. It’s been reported that came after a call with European Union regulators where they seemed ready to approve the deal. They’re due to provide their verdict by May 22, and it will be interesting to see if the opposition of the CMA and FTC push them to block it as well. Microsoft had reportedly been planning to close the deal regardless of the FTC suit, with the goal of making it harder to unwind, but that may be harder to do with the CMA opposition. An appeal will likely take upwards of nine month, meaning the deal will be unlikely to close this year if the appeal is even successful.

Microsoft wants to emulate the Netflix model of underpricing its service to drive signups and force competitors to follow, creating a new model that privileges itself. We already know how that plays out: an offering that seems consumer-friendly will ultimately become more expensive and less attractive over time, once it’s too late to turn back the clock. Anyone who enjoys playing games and wants to encourage a vibrant industry should want to stifle those plans.

We can only hope that the combined opposition of the CMA and FTC is enough to sink an enormous, industry-altering acquisition that will only serve to enhance Microsoft’s power in the industry.