The U.K. Competition and Markets Authority (CMA) has announced it will prevent the proposed Microsoft purchase of Activision Blizzard for $68.7 billion.  The deal was blocked on the ground that the merger could make Microsoft even stronger in cloud gaming, stifling competition in the growing market.

In making the decision, the CMA noted that Microsoft had proposed a remedy to address concerns.  However, the CMA rejected the proposed remedy as having significant shortcomings.


DFC Intelligence has been following the CMA investigation since it announced its initial findings last September.  Therefore, the results are not entirely surprising.  As we argued at the time the CMA concerns around cloud gaming competition seemed to be serious.  The big question now is how far Microsoft will go in fighting the decision.

In recap, last September the CMA issued provisional findings presenting two potential theories of harm.  Theory of Harm One focused on the merger hurting Sony while Theory of Harm Two was concerned with competition in cloud gaming.  In March, the CMA announced it was dropping Theory of Harm One and focusing primarily on Theory of Harm Two.

Back in October, when Microsoft responded to the CMA, DFC argued that Theory of Harm Two was the more serious accusation.  Microsoft’s spent the bulk of its 33-page response on arguing against Theory of Harm One.  Microsoft had a short dismissal of Theory of Harm Two as a “novel theory of harm without any precedent.”  At the time, DFC was concerned that this reply was avoiding what we considered the more serious Theory of Harm Two.

The big problem with Microsoft is that they own the leading PC operating system with Windows and they also own the Azure cloud game infrastructure that competitors (such as Sony) use to operate cloud games. 

As DFC has found to its detriment, services like Game Pass tend to force users into other Microsoft services via a general Microsoft account. It takes a great deal of effort to turn off Game Pass interference with other Microsoft services.  At DFC we have banned Game Pass on all company PCs for this reason.

The simple remedy would seem to be for Microsoft to separate a Game Pass account from all other Microsoft accounts.  Microsoft has yet to offer this remedy.  However, it is unclear whether this remedy would be enough.  The CMA makes an interesting point that “accepting Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA.”  In other words, blocking the merger is easier than the ongoing effort of trying to make sure Microsoft remains in compliance post-merger.     

Of course, the larger question is will Microsoft win via appeal or agree to further compromise?  By glossing over the primary U.K. concerns Microsoft was challenging the CMA to block the deal.  However, this is an ongoing political battle.  The question now becomes how far is Microsoft willing to compromise to get the deal done?

Microsoft is in a position where much of its future in the game business depends on the merger going through.  However, at some point offering too many concessions to regulators will undermine the strategic objectives of the acquisition. 

One thing that does not seem to work with U.K. regulators are threats.  In February, Activision CEO Bobby Kotick said on CNBC if the U.K. blocks the deals they will become “Death Valley,” not Silicon Valley.  Already it looks like Activision is still measuring how aggressive it will be in its response.  We will discuss that in our analysis of the just filed Activision Blizzard 8k.

The Microsoft purchase of Activision is by no means dead.  In fact, DFC still believes that a compromise will be reached.  What it does mean, is that the deal going through is still a long way off.  In the DFC Intelligence Video Game Stock Portfolio we sold our holding in Activision Blizzard at the start of April for exactly that concern.