Approximately one and half years ago, in January 2022 the leading personal computer system developer, Microsoft, announced its intention to acquire the leading developer of interactive entertainment for gaming consoles, Activision. You may easily recall if we mention the developer behind popular games such as Candy Crush, Call of Duty, or World of Warcraft.

The announcement sent shockwaves across the globe, as it was labelled one of the most influential deals in gamin history, with a deal worth $50,5 billion (($68,7 bn). However, since then, the deal has yet to close due to concerns related to competition law. Specifically, the focus has been on how this acquisition, aimed at bolstering Microsoft’s growth in the gaming history, might impact other players with the same sector.

Accordingly, the three major competition watchdogs, the European Union Commission, the UK’s Competition and Market’s Authority (‘CMA’) and the US’s Federal Trade Commission (‘FTC’) have all been notified of the deal and consequently initiated investigations onto the proposed acquisition. Of these authorities, only the CMA chose not to clear it, thereby leaving itself in a position separate from the Commission and FTC.  All three competition authorities have the responsibility of ensuring that the acquisition deal would not harm within their respective jurisdictions.

In this blog post Barnes Law will be discussing all the developments since the first announcement of the deal.

When are Mergers Cleared?

In simple terms, competition law aims to promote competition by ensuring that consumers have access to a wide variety of products. The other side of the same token is businesses, such as Microsoft and Activision, are in competition with each other to serve the largest number of consumers and increase their profits. In this context, when large firms seek to acquire one another, competition within a market may become distorted because one major competitor would cease to exist. Where this is the situation, the relevant competition authority in a given jurisdiction, may choose not to not clear such an acquisition, resulting in the deal not taking place.

Conversely, when a deal is cleared, it signifies that the competition authority never believed that an existing player has ever been in a competitor position in that given market therefore, had no substantial impact on the competition.

Given this framework, what was the situation with Microsoft / Activision acquisition deal?

The Commission’s Review

The Commission, although known for its stringent antitrust regulation, was the first authority to clear the deal. The Commission cited the presence of strong competitors in the EU gaming market hence, which meant that Microsoft held a relatively smaller market share. Therefore, in simple terms the Commission approved Microsoft’s acquisition of Activision in the EU.

Later on, the UK authority, the CMA initiated its review.

The UK and the CMA

The CMA defined the relevant market as the cloud gaming market instead of the gaming market. In light of this, the narrow the relevant market is the more likely it is that competition will be adversely impacted within that market. Hence, rendering the clearance of a deal more unlikely.

As a result of this definition, the CMA raised concerns that the acquisition in the cloud-gaming market would lead to higher prices, lesser choice for consumers as well as limited innovation. Therefore, the CMA did not clear the deal. This decision effectively blocked Microsoft’s acquisition of Activision in the UK.

The US and the FTC

On the other hand, in the US in December 2022, the FTC sued to block the deal. Then, six months later in June 2023, the FTC filed another lawsuit seeking a temporary restraining order to stop the merger moving ahead.  In less than a month of the second lawsuit, the District Court in the Norther District of California rejected the FTC’s restraining order and ruled that the Authority had not proven the likelihood that the merger would substantially reduce competition. The FTC’s appeal was further denied too.

The result of these differing decisions was that the merger was cleared in great part of the world except the UK. For the UK which has been actively working to create a more business-friendly environment and attract more undertakings to its jurisdictions especially after Brexit, being left out was probably the least thing desired. Consequently, with a somewhat surprising decision, the CMA requested Microsoft to submit a restructured deal for another review. This ‘surprise decision’ can be interpreted as an indication that neither the companies involved, Microsoft and Activision, nor the CMA wish to abandon the deal but rather seek a way to approve.

Restructuring

Microsoft, to address the CMA’s concerns regarding cloud game streaming, decided to restructure the transaction by acquiring a narrower set of rights. This was the route taken after the CMA announced that it will not accept any new remedies from Microsoft.

Subsequently, on 21 August 2023 Microsoft proposed a restructuring plan. Under the proposal Microsoft will transfer the cloud streaming rights for its all current and new Activision and console games released over the next fifteen-years to a leading game publisher, Ubisoft Entertainment SA.

This proposal ensures that Microsoft will no longer have the exclusive rights to release Activision’s games on its own cloud streaming service. In other words, it ensures gamers who do not use Microsoft’s service to access these games. This protects variety of games to consumers without imposing then any barriers of access. Furthermore, Microsoft will no longer have control over the licensing terms of Activision games for its rivals.

This new deal as, defined by Microsoft itself ‘presents a substantially different transaction than the transaction submitted to the CMA in 2022’. It expires on 18 October 2023 hence the CMA should reach to a decision by this date. Otherwise, the deal will expire. Furthermore, the Commission which previously cleared the acquisition is closely following the restructuring as it has the potential of being reviewed by the Commission again as a new deal.

To be Continued…

Until the deal expires in October 2023 whether leading to a successful merger or to a junked deal there is still a lot to follow. But for now, we can easily summarise the status as following. If successful, the $50,5 billion acquisition would mark a significant milestone in gaming history. The hundred- and eighty-degree change in the CMA’s approach also effectively demonstrates how the UK is trying to protect its business-friendly attitude and attract even more undertakings, especially after Brexit.