The biggest gaming deal in history has hit another regulatory roadblock. As Microsoft continues to seek government approval for their acquisition of Activision, regulators in the UK and EU have announced conflicting opinions on the deal, creating a confusion about what's to come for the merger.
As the largest M&A deal of 2022, Microsoft's Activision acquisition has a hefty price tag of $68 billion and if it is successful, it will be the biggest gaming buyout in industry history. With stakes this high, it's no surprise that regulatory bodies in the UK, EU, US, and more are scrutinizing the intricacies of the deal to determine if the merger could negatively impact industry competition. And even less surprisingly, each of these regulators holds conflicting opinions on the deal, with some engaging in legal action to block it and others accepting it (after some concessions from Microsoft). Nevertheless, the deal needs official approval from regulatory bodies in the UK, US, and EU to succeed, and so far, the road to closing this acquisition has been rocky and rife with litigation.
Let's take a look at where the merger currently stands concerning regulatory approval, how the FTC may respond, and what the potential legal risks will be moving forward.
Conflicting Opinions Across the Pond
Earlier this spring, the UK's Competition and Market Authority (CMA) shocked the industry when they vetoed the deal over concerns that it would offer reduced innovation and competition in the rapidly expanding cloud gaming market. Despite Microsoft's best efforts in submitting plans to address the CMA's apprehension, the entity still believes that the deal will negatively impact the future of cloud gaming. Microsoft and Activision are already working to reverse the appeal and are facing a lengthy legal battle that will likely cost millions, setting the precedent for future mergers in the industry when it comes to litigation risk and regulatory approval.
Over in the EU, regulators are singing a different tune. On May 15, just three weeks after the UK's industry-shaking decision, the European Commission announced its approval of the deal under the EU Merger Regulation. While they reached conclusions similar to those reported by the CMA, they ultimately were content with Microsoft's proposed commitments as illustrated below.
Source: The European Commission
Mergers that need multi-jurisdictional approval have varying requirements and increase in complexity when contrasting approaches are proposed (and approved) by different countries. For example, the EU approved the deal after Microsoft presented remedies to their concerns; their proposed fixes, though, only cover licensing in the EU.
Unfortunately, the EU's announcement didn't sway UK regulators into reconsideration. The CMA released a statement following the EU decision that read: "Microsoft's proposals, accepted by the European Commission today, would allow Microsoft to set the terms and conditions for this market for the next 10 years. They would replace a free, open, and competitive market with one subject to ongoing regulation of the games Microsoft sells, the platforms to which it sells them, and the conditions of sale. This is one of the reasons the CMA's independent panel group rejected Microsoft's proposals and prevented this deal. While we recognize and respect that the European Commission is entitled to take a different view, the CMA stands by its decision."
Now that the UK has doubled down on its decision to destabilize the deal, what will the FTC do as it moves towards an August trial date that will help determine the future of the acquisition?
The US's Regulatory Pressure
As we know, the Federal Trade Commission (FTC) has not been an avid supporter of the deal, citing that it was a direct violation of antitrust law and could unfairly boost Microsoft's position in the market. They are now investigating the merger and have requested documents related to Microsoft's next-generation gaming system, crossplay features, and more to help ease concerns over competition reduction. To better understand the intricacies of the merger, we asked IP Advisory Panel Member and video gaming expert Josh Grant to provide his insights on the deal's recent developments. According to Grant, the EU's recent approval paired with the positive reception received from an estimated 37 other countries (including a recent approval from China) could place more pressure on the US District Court to approve the merger. Further, the FTC may feel inclined to strike a bargain with Microsoft and gain some consumer-oriented concessions at home before August rolls around. With the UK's lack of concern over Call of Duty exclusivity (which was one of the main points of the FTC's argument), the entity may be more inclined to change its stance.
Grant also highlighted one point of interest regarding the deal and the US economy. During the most recent set of talks regarding the nation's debt, budget, and the potential for a US default, the topic of this merger has been thrown into the political battlefield, being used by both Republicans and Democrats as a point of positioning as Republican lawmakers have sharply asked some Democrats why they are siding with Sony in blocking the deal in an April 18 Congressional hearing. This rift shows that US legislators are not unified in their thoughts on the deal; some feel that Sony does not need protection on account of its market dominance, and others feel that the deal will destroy the market as we know it. As we move closer to the 2024 election, it would be remiss to ignore the political shadow cast over the merger as the trial date looms.
Microsoft's Struggle for Success
To start, Microsoft's acquisition track record has created some uncertainty around the deal, pushing regulators to look at the gaming giant in a harsher light. Grant explains that the software maker's troublesome behavior started with their Bungie/ Halo merger and was further spotlighted throughout their acquisitions of Bethesda Studios and Arkane/ Arcane. After the Bethesda deal, Bethesda's AAA franchise hopeful, Starfield, was pulled from non-Microsoft channels – despite promises that it would remain open and available on competitive channels. On top of this, Starfield has been significantly delayed, highlighting Microsoft's inability to fulfill obligations. The company's biggest rival, Sony, is set to release their upcoming exclusive this fall, right around Starfield's new projected release date. And with Sony already on the opposition when it comes to Microsoft's battle with the FTC, this delay is only going to fuel their fire.
Additionally, Redfall- the first new IP release from Arcane Austin post-acquisition- was recently launched, only to be met with damning critical reviews. Grant reported that beyond technical glitches, reviewers concluded it just didn't bring enough to the table in its core gameplay to surprise and delight players- the guiding principle in game development at Microsoft.
Grant also feels that these issues, when paired with concerning macroeconomic trends, uncertainty around the cost-benefit of the metaverse, and several rounds of tech layoffs could paint a difficult picture for Phil Specter and the Xbox brand overall. This could put even more pressure on the Microsoft team to deliver off of internal IP and existing investments, making the ATVI deal seem riskier and riskier, particularly if it comes with costly concession strings attached.
Overall, though, Activision will remain stable regardless of the acquisition's outcome. Grant thinks that if the deal does not close soon, Microsoft will be on the hook to pay Activision a hefty $3 billion breakup fee to halt the merger. And many industry players will lament the idea that those at Activision will benefit from the payout.
The Legal Landscape
As regulatory action surrounding the deal continues to take shape, Microsoft will undoubtedly be forced to fight for the future of the merger against both regulators and consumers. Typically, CMA decisions are difficult to overturn; the entity won 67% of merger appeals from 2010 to 2020, and even if the decision is appealed, the merger still isn't guaranteed to go through. And as it currently stands with the FTC, the regulator and gaming companies are currently at a stalemate over discovery; the FTC has asked for more documentation while the companies say they have already provided them with more than 17 million pages of relevant findings.
With appeals headed to the courts in the UK and here in the US, Microsoft is also facing legal challenges from consumers directly; a group of gamers has recently refiled a complaint against the merger, echoing claims that it will harm industry competition.
Antitrust disputes in the gaming space are now entering the courts in droves, and it is important for companies to prepare for potential industry shifts now to ensure they are set up for success in the evolving market. Engaging with gaming industry experts can help prepare organizations for increased regulatory scrutiny by providing insights on the deal's potential competitive effects and completing an analysis of the market landscape.
In addition, those in the gaming space considering M&As as part of their business strategy should consult with former regulators and c-suite executives who can assess plaintiff practices alongside economic experts who can discuss general market conditions and competitive landscapes.
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