EU and UK parallel reviews into Microsoft deal to buy Activision highlights different approaches to remedy negotiations

Legal Analysis 25 May

EU and UK parallel reviews into Microsoft deal to buy Activision highlights different approaches to remedy negotiations

  • CMA process necessitated later stage engagement
  • EC surveyed 70 market participants in two rounds 
  • CMA saw cloud gaming as distinct market

The parallel EU and UK reviews of Microsoft’s [NASDAQ:MSFT] acquisition of Activision Blizzard [NASDAQ:ATVI] saw different approaches to remedy negotiations, with intensive discussions in Brussels kicking off at an earlier stage of the review than in London, sources familiar with the matter told this news service.

The European Commission (EC) and the UK Competition and Markets Authority (CMA) reached opposite conclusions in their review in the past few weeks, respectively clearing and prohibiting the deal.

As the EC and the CMA were diverging on their diagnoses, the remedy discussions in both jurisdictions were also taking different tracks, according to sources familiar with the matter.

The remedies offered in the EU and the UK were fundamentally the same, with minor differences as a result of the protracted negotiations with the EC, said a source familiar with the parties. Negotiations with the EC were intensive and kicked off at an earlier stage than with the CMA, with the pledge for royalty-free licences for PC games forming the basis of Microsoft’s proposal, said this source.

The EC conducted two sets of market tests, as the remedy was progressively tweaked to include a licence for console games and then expanded to be applicable to the streaming of games included in multi-game subscription services, an EC official said. The EC ran a broad market test that went out to 70 participants, the official noted.

In the UK, Microsoft had tried to approach the CMA early in the procedure to open remedy discussions, but the agency did not want to do so before issuing its provisional findings, said the source. 

The CMA’s procedure allows for parties to provide remedies either at the end of the Phase I investigation or once it has issued its provisional findings in Phase II.

“In practice, remedy discussions in Brussels often take place while the substance of the case is still being debated,” commented Richard Pepper, a partner at Macfarlanes. “This process can lend itself to a compromise outcome more so than in London, where there is a greater procedural divide between discussions on remedies and substance,” he said.

Different forecasts for cloud gaming

At the root of the divergent decisions were conflicting understandings of how the market for cloud game streaming operates and where each agency saw it headed.

The EC ultimately concluded that cloud gaming could not be considered as a distinct market as there are strong competitive constraints on cloud gaming by traditional distribution methods like the download of PC or console games, said the EC official.

The CMA defined a market for cloud gaming services, concluding that Microsoft has a 60-70% share of it, per the decision. The CMA looked to internal documents and anticipated future customer behaviour to determine that cloud gaming is a segment in which Microsoft faces rivals like Amazon [NASDAQ:AMZN] and Google [NASDAQ:GOOGL], and not Sony [TYO:6758] and Nintendo, and where the inputs are vastly different, according to the decision.

The two agencies also ended up with different prognostications over how the market would grow in the years to come. 

As consoles age and technology rapidly advances, consumers could soon conclude that it is not worth spending a significant sum on an expensive console, and that cloud streaming would be the much cheaper alternative, according to the CMA’s findings. Major technological changes could make cloud gaming an attractive rival to console within the next five years, it said in the decision.

The EC meanwhile saw both their deployment and consumers' uptake of cloud gaming as happening at a slower pace, given the technical constraints.

Remedy: supporters and critics

Microsoft’s accepted remedy offer consisted of a set of commitments that would grant a licence to EEA consumers for all current and future Activision games and corresponding royalty-free licences to cloud gaming streaming service providers that would allow gamers to play their games on any device using any operating system.

“It will frontload the development and adoption of cloud gaming in this market to an extent that would probably take years if you were to leave the market on its own,” said Joost Rietveld, an associate professor at UCL and gaming industry specialist. Even if such platforms are unable to monetise that content directly, Activision’s gaming catalogue still might help them draw in consumers and sell subscriptions, he added.

Cloud gaming is at a nascent stage with platforms trying different business models for digitally distributing games, and with "bring your own game"-style delivery - where gamers port games bought on third-party storefronts - being only one of them, noted Rietveld. Multi-game subscription services, where gamers pay a Netflix-style fee for access a catalogue of games that can be streamed, are another emerging model, he said.

Competitors, regardless of their business models, will be able to stream Activision games, but the commitments do not require Microsoft to offer those games to multi-game subscription services, said the EC official. Those rival services can stream Activision Games but will have to negotiate with Microsoft on whether to integrate Activision’s games into their multi-game subscription service, the official added.

For the CMA, the lack of clarity on how rivals could port games to their subscription service using the licence, and the dependence on the goodwill of Microsoft to allow them to do so, translated into skepticism on its applicability to differing business models, the agency wrote in its decision.

The CMA further expressed concern with the licence’s implied restriction that any gaming service that wishes to include such games in their services, would have to use or be compatible with the Windows OS version of those games (to the detriment of, for example, Linux OS-based services like Google's now discontinued Stadia platform). On that basis, the CMA concluded that Microsoft’s pledge did not meet its high bar for a behavioural remedy.

A spokesperson for Microsoft referred to a statement from President Brad Smith who noted that he remedy will allow millions of consumers worldwide to play Activision titles on any device they choose. Activision declined to comment.

A spokesperson for the CMA referred to its decision which found that accepting Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA. “Their proposals were not effective to remedy our concerns and would have replaced competition with ineffective regulation,” said panel chair Martin Coleman in a press release.

"The commitments offered by Microsoft will enable for the first time the streaming of such games in any cloud game streaming services, enhancing competition and opportunities for growth," said EC EVP Vestager in a statement following the decision.