Microsoft's Activision EC filing approaching, key issues covered in prenotification, sources say

News Analysis 13 September

Microsoft's Activision EC filing approaching, key issues covered in prenotification, sources say

  • Not much more to cover in pre-notification
  • EC not expected to mirror CMA review  
  • Microsoft faces 'difficult' CMA on Call of Duty behavioural pledges

The filing of the proposed acquisition of Activision Blizzard [NASDAQ:ATVI] by Microsoft [NASDAQ:MSFT] with the European Commission (EC) is approaching, with most key issues having been covered during prenotification, two sources familiar with the matter told this news service.

The deal is moving towards a filing, one of the sources said, noting that it was hard to be precise on exact timing. The parties’ impression is that there is not much more to discuss with the case team, this source said. “A lot has been discussed,” agreed a second source.

In January, Microsoft announced its intention to acquire Activision Blizzard, a US-based publisher and distributor of games such as Warcraft, Call of Duty and Candy Crush. The transaction will create the world’s third-largest gaming company by revenue behind Tencent [HKG:0700] and Sony [NYSE:SONY].

The EC has not singled out major concerns after thorough prenotification, according to the first source. The EC’s review is not expected to mirror the Competition and Market Authority’s (CMA), the source said. For example, the EC does not appear to be interested in honing in on cloud gaming, this source said.

In its Phase I summary decision, the CMA said the merger could potentially harm competition in cloud gaming, and that Microsoft could leverage its broader ecosystem together with Activision’s game catalogue to strengthen network effects, raise barriers to entry and ultimately foreclose rivals.

The CMA is inherently cautious, and the transaction was always destined to go to Phase II, said a third party source.

Agencies in general are delivering an enormous amount of scrutiny, the first source added. However, the CMA is looking less flexible and increasingly isolated, the source said, adding that discussing behavioural remedies with the CMA has become complicated.

CMA former head Andrea Coscelli said at a conference in April that the bar for behavioural remedies had raised very significantly for the CMA. “It's almost an exception that now we would accept the behavioural remedies,” he said at the time.

The parties so far have committed to keeping the blockbuster game Call of Duty open to all gaming platforms through the term of any existing agreement with Activision and to make it available on Sony’s Play Station beyond the existing agreement. Microsoft has also said that it would commit to a series of open app store principles, which include a commitment not to require developers to use its own payment system and to not require them to offer their games to Microsoft on more favourable terms.

Input foreclosure

The EC is expected to investigate vertical theories of harm, as reported. The CMA also honed in on input foreclosure, positing that Microsoft could harm competition by withholding or degrading Activision’s content, including Call of Duty, from other consoles or multi-game subscription services.

The CMA said that it did not limit its analysis to an assessment of short-term or ‘static’ cost and benefits in reaching its concerns around input foreclosure, and instead identified Microsoft’s broader strategies, as evidenced by internal documents and its post-merger integration of ZeniMax and Bethesda.

Sony is the clear leader in console gaming and Nintendo, which is in second place, has never had Call of Duty on its platform, noted the first source. Sony has the most exclusive titles and Call of Duty only accounts for a very minor share, below 5%, of Sony’s revenues, said the source.

The second theory of harm, as raised by the CMA, is much more speculative, noted the first source. The CMA expressed concern that Microsoft could leverage its assets in other business areas like its Azure cloud platform and its Windows PC operating system. The source noted that Valve's Steam is the leading PC gaming distribution platform, and that Windows has not demonstrated the sort of pre-eminence that the CMA has attributed to it, said the source.

The deal has a termination date of 18 January 2023, which can be extended twice up to 18 July 2023.

A spokesperson for Microsoft referred to a statement by Microsoft’s Corporate Vice President & General Counsel Lisa Tanzi, who said that the company remains confident that the deal will close in the fiscal year 2023 as initially anticipated.

“We expect and think it’s appropriate for regulators to take a close look at this acquisition. We have been clear about how we plan to run our gaming business and why we believe the deal will benefit gamers, developers, and the industry,” said Tanzi.

“We’re committed to answering questions from regulators and ultimately believe a thorough review will help the deal close with broad confidence, and that it will be positive for competition,” said Tanzi.

Activision did not respond to a request for comment. EC does not comment on ongoing investigations.

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