Game over: Microsoft logo is seen on a smartphone placed on displayed Activision Blizzard’s games characters. While the case is complex, Microsoft’s appeal faces a huge hurdle. — Reuters
THE UK’s block on Microsoft Corp’s acquisition of Activision Blizzard Inc is the starkest reminder yet that Britain is ready to see fatal flaws in deal-making that other regimes might yet be able to live with.
The message to bosses contemplating bold merger and acquisition (M&A) will be: Think again.
The worry was that Microsoft could withhold Activision’s leading franchise – the Call of Duty shooter game – from rival gaming platforms if it gained control.
The UK regulator, the Competition and Markets Authority, (CMA) eventually came round to the view that Microsoft actually wouldn’t do this in the console gaming market where its Xbox machine competes with Sony Group Corp’s PlayStation.
But in the final analysis, it concluded that the software giant still had strong incentives to make Activision games exclusive in the less mature market of cloud gaming.
That analysis is in itself open to challenge. After all, the assessment that there’s no incentive to be anti-competitive in consoles was pretty cut and dry.
So why are the dynamics so clearly worrying in the cloud, a market whose evolution is itself uncertain?
One answer is that console gaming is a mature industry, so Microsoft would without doubt lose a lot of potential licensing revenue by choosing to shut out PlayStation’s huge established base of gamers.
Cloud gaming is in its infancy, so there’s an incentive to stage a land grab. Even so, the diverging analyses of the impact on the two markets is jarring.
That brings us to the UK’s decision to reject Microsoft’s proposed fix – an offer to make Activision titles available to certain cloud gaming competitors for a period of time.
This is one of those so-called “behavioural remedies” to which the UK is especially averse.
The proposal was deemed too narrow, too easy for Microsoft to get around and imposed a burdensome monitoring duty on the regulator.
Again, it’s a very British way of looking at the situation.
How the processes launched by the European Commission (EC) and the US Federal Trade Commission (FTC) play out now – while the UK decision trundles through a lengthy appeals process – will be especially interesting. In general, the EC appears much more willing to accept behavioural remedies.
Might it conceivably be more willing to accept Microsoft’s commitments?
Of course, in the wake of the CMA’s decision, doing so might make Europe look soft – and no regulator wants to be accused of that.
In the United States, the case against the deal ultimately has to be proven before a judge.
That’s a high bar in the first place to demonstrate a transaction causes harm.
It’s clearly conceivable that different conclusions could be reached.
Sounding the alarm
This case isn’t a credibility issue for the CMA yet – not least given the FTC has sounded the alarm and the EC process has yet to conclude. But it could become one if peer regimes conclude otherwise.
Clearly, all regulators are under pressure to claim a Big Tech scalp, facing accusations they were too lenient on the industry in the past.
The CMA is also pursuing its own path in Brexit Britain.
Against that backdrop, the episode underscores that the regulator is going to err on the side of caution in permitting incumbents to do deals in fast-moving markets for fear of turning out, in retrospect, to be lenient.
While the case is complex, Microsoft’s appeal faces a huge hurdle.
The criteria give the CMA cover to have used considerable discretion in its final judgement. Unless Microsoft can find a major procedural failing, it will have to establish that the CMA was irrational to draw the conclusions it did from the material before it.
The knottier the arguments, the easier it may be to find economists who can draw contrasting conclusions from the evidence. But that in itself doesn’t make it easy to demonstrate the CMA had zero grounds to conclude what it did.
Very few appeals succeed, and it would be seismic if this one did.
Maybe the CMA is taking a calculated risk.
After all, it seems the US authorities are increasingly keen to sue to block deals despite the risk of being seen to lose in court.
Taking any action in opposition to a deal has a deterrent effect on M&A, whatever the grounds and whether that’s the intention or not. — Bloomberg
Chris Hughes is a Bloomberg Opinion columnist covering deals. The views expressed here are the writer’s own.
