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UK CMA softens stance after blocking deal

TechnologyUK CMA softens stance after blocking deal

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UK regulator appears to soften stance on Microsoft-Activision deal in surprise move

Britain’s competition regulator, the staunchest opponent of Microsoft’s $69 billion acquisition of gaming giant Activision Blizzard, flat out blocked the deal in April.

It appears the U.K. Competitions and Markets Authority may have now had a change of heart.

After a U.S. judge on Tuesday denied the the Federal Trade Commission’s motion for a preliminary injunction to stop Microsoft from completing its purchase of Activision Blizzard, the U.K. CMA said it was ready to go back to the negotiations table with the Redmond giant.

But what assurances can Microsoft offer to the CMA, after previous attempts at concessions have failed?

Why the CMA blocked the Microsoft-Activision deal

The U.K. CMA efficiently blocked the acquisition in April, saying the deal raises competition concerns in the nascent cloud gaming market. Like other regulators, the CMA is concerned that Microsoft could take Activision games and make them exclusive to its own platforms.

Cloud gaming is a technology that enables gamers to access games via remote servers — effectively streaming a game like you would a movie on Netflix. The technology is still in its infancy, but Microsoft is betting big on it becoming a mainstream way of playing games.

“Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities,” the CMA said in April.

Why did it change course?

An Activision Blizzard’s Call of Duty: Modern Warfare video game is inserted into the Microsoft’s Xbox One video game console arranged in Denver, Colorado, on Wednesday, Jan. 19, 2022.

Michael Ciaglo | Bloomberg | Getty Images

“We stand ready to consider any proposals from Microsoft to restructure the transaction in a way that would address the concerns set out in our Final Report,” a CMA spokesperson told CNBC via email on Tuesday.

“In order to be able to prioritise work on these proposals, Microsoft and Activision have agreed with the CMA that a stay of litigation in the UK would be in the public interest and all parties have made a joint submission to the Competition Appeal Tribunal to this effect.”

The regulator could have gone ahead and progressed with legal action in the courts. However, this would have been a lengthy and costly process, and may have been particularly bruising for the watchdog, if it were to lose the case.

Alex Haffner, a competition lawyer at law firm Fladgate, told CNBC that the setback to the FTC essentially left the CMA “exposed to being the only regulator that has actually blocked the deal.”

“Why did they do this? You might call it face saving, you might also call it pragmatic, given the circumstances,” he said.

“It’s been backed into a corner and publicly said it’s announced a stay of the appeal to negotiate with Microsoft,” Haffner added. “You add that, together with the political machinations of all of the heat the CMA’s got. It’s pretty nailed on [that] it’s going to negotiate some kind of settlement with the parties.”

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What happens next?

The CMA, Microsoft and Activision now look set to hash out a possible resolution to the regulator’s concerns to get a deal over the line.

Microsoft could seek to provide further commitments to the regulator. It’s not yet clear at this stage what those pledges could look like, but Haffner said they would need to be “proportionate to the concerns raised.”

“There will be an intense period of negotiations on both sides they need to get it done quickly,” Haffner told CNBC. “We’ll get it done in a week or so, I’d say.”

Microsoft has a July 18 deadline to complete the deal.

Microsoft President Brad Smith says it's a 'good day for gamers' after Nintendo, Nvidia deals

Microsoft has already offered concessions to the U.K. regulator which were rejected.

One of the remedies involves Microsoft making certain games available on other platforms for a defined period of time. For example, Microsoft said in February that it would bring Xbox PC games to Nvidia’s cloud gaming service. The company also signed a 10-year deal with rival Nintendo to bring Call of Duty to the Japanese firm’s platforms the same day as the game would become available on the Xbox.

To the European Union regulators which approved the deal in May, Microsoft said it would offer royalty-free licenses to cloud gaming platforms to stream Activision games, if a consumer has purchased them. 

But the CMA has rejected similar concessions on the basis that they would be difficult to monitor and enforce, and the rapidly-fluctuating nature of the nascent cloud gaming sector means such as a remedy may not take into account changes in the cloud market.

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So Microsoft will need to take another try at a licensing concession.

Will Microsoft have to divest some business?

Prior to softening its stance in its April ruling, the CMA in February gave a notice of possible solutions to Microsoft. One of those was for Microsoft to sell its business associated with the popular Call of Duty game. Other remedies included a divestiture of some of the Activision Blizzard business.

Microsoft President Brad Smith told CNBC in February that he didn’t see a “feasible path” to sell off Call of Duty.

But a divestiture of some sort could be on the cards, according to Dan Ives, analyst at Wedbush Securities. Ives said in a note on Wednesday that Microsoft could carve out its Game Pass subscription service in the U.K. to satisfy the CMA.

Game Pass is Microsoft’s subscription service on the Xbox console and PC, which gives users access to hundreds of games.

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