An Argument Against The CMA's Decision To Block The Activision Blizzard Acquisition By Microsoft

[Herbert]

So it's official, the Competition Markets Authority aka the CMA which is the regulatory agency for the UK has blocked Microsoft's acquisition of Activision Blizzard in the UK. Of course Microsoft is going to appeal the decision but this is going to prolong the finalization of the acquisition. Activision Blizzard CEO Bobby Kotick has also made a statement.

In the end, I still believe this deal goes through. I think some people forget that the deal has already been approved in 6 countries including: South Africa, Saudi Arabia, Brazil, Chile, Serbia and the last one of those countries is Japan, where Microsoft's top two gaming competitors are headquartered.

I find it very interesting that a country like Japan who you could legitimately argue, has a national interest in this deal, found that the merger will not harm competition.

Quick Summary
I'll be completely honest. The block makes no sense to me. Microsoft is acquiring a publisher that produces gaming software, not a competitor that is competing directly in the "cloud gaming" market. This is an incredibly flawed conclusion.

These Agencies Don't Understand The Gaming Industry
I suspect that the people making the regulatory decisions really don't understand the industry. But this type of outcome honestly makes you wonder if something else is going on. Bobby Kotick has already indicated that Lina Khan(chairperson of the FTC) had a meeting with the head of the CMA about a week and a half before the decision. The idea that they would consider "cloud gaming" a separate market from the larger gaming industry which includes Nintendo, Sony and mobile games, seems like a massive error in thinking.

It would be like separating gasoline into different markets based on its octane rating. Excluding ethanol, its all made from crude oil! In the same way "cloud gaming" is simply gaming. The CMA is focusing on the method of delivery which is problematic when evaluating this deal on the merits of harming competition in its given market.  This all feels like a meticulously constructed pathway to block the deal.

Should "Cloud Gaming" Be Considered A Different Market?
Even if "cloud gaming" was considered a different market(and not just a segment of the larger gaming market), having Activision Blizzard content on the Xbox platform definitely makes it a more attractive option but it doesn't increase their cloud infrastructure. And it doesn't increase any sort of perceived "cloud gaming" market share, meaning Xbox does not gain any additional "cloud gaming" customers by completing this deal.

Again assuming "cloud gaming" is a market you wouldn't do any sort of heavy handed regulation when a market is in its infancy. You let it develop, you give it time to actually establish itself. Regulation traditionally comes after a market has been established. That's because you actually have to have an established market before you have something to regulate. The CMA is trying to regulate the idea of a market.

Taking the position that you need immediate regulation is an overreach and will only stifle the growth of a new market, especially if there is only one player that's shown that they are willing to invest in it moving forward. What would have happened if the FTC began regulating Tesla before it was established. Tesla was unprofitable for years, they never would have made it to profitability. Now however, Tesla is the most valuable automaker in the entire world. None of the established automakers have stepped up to challenge Tesla in a significant way with EV vehicles.

Why I Strongly Feel Like The Regulatory Agencies Are Reaching By Focusing On "Cloud Gaming"
Back in 2021 Sony acquired Crunchyroll from AT&T. At the time Funimation(owned by Sony) and Crunchyroll were the top two anime streaming services. Most people that watch anime used either Funimation or Crunchyroll. About a year or so later they moved all of Funimation's content to Crunchyroll. Some of you will see where I'm going here.

Based on the CMA's thinking in this case, "Anime Streaming" could be considered a narrowly defined market and if you did consider it a market, you definitely wouldn't want the two biggest competitors in the market to merge. But I didn't hear a mumbling word about this. At the time.

And would you believe it if I told you that Crunchyroll has increased its pricing since then? You can't make this stuff up! I remember writing a post about it last year speculating on how Sony could create an anime superpower, I even wrote a post about how PlayStation could use Sony's anime content to leverage a new all encompassing streaming service which provided gaming, movies and anime to give itself a strong competitive advantage over gamepass.

Funny thing about all that though, fast forward to 2023 and we see that anime streaming isn't dominated by just one party! Crunchyroll, Netflix, Hulu and even Amazon Prime all have their own unique anime offerings. I am personally subscribed to all 4 services! If there is some hot new anime that I absolutely must see, I'm going to subscribe to the service. In the same way, the idea that we will only choose one cloud gaming service is ridiculous. Gamers care about access to great games not access to servers.

If other cloud gaming services have must play content, gamers will subscribe it's that simple. As I've stated previously, Activision Blizzard is mostly a content and player base buy. It has absolutely nothing to do with cloud infrastructure, cloud talent expertise or cloud customers by buying Activision Blizzard Microsoft gains no "Cloud" related advantages.

You Need To Allow First Adopters To Receive The Benefits Of Acting First
In the same way, we can't reasonably expect PlayStation and Nintendo to push a new dynamic onto an established market. Nintendo has already stopped competing with Sony and Microsoft in terms of graphics capability when designing their consoles and PlayStation President and CEO Jim Ryan has openly stated that he believes that a service like Xbox gamepass is unsustainable. It's very clear to see that their vision for gaming differs drastically form Xbox. And that's okay, it's doesn't need to be a priority for them, PlayStation and Nintendo are currently dominating the gaming market.

Its not fair to consumers or to Xbox to hold up their plans. And I think Sony's opening arguments against the deal which centered around Call of Duty is very telling, as they weren't making a "cloud gaming" argument, they were making an argument against the deal because of the potential loss of access to gaming software.

Why Haven't The Other Big Tech Companies Made Massive Investments?
If the market has so much potential how come Apple, Google and Amazon aren't making the same type of massive investment in getting things off the ground? The CMA should be looking at where Xbox's main competitor is making its investments, if they did, they would find its overwhelmingly into content. That's the market, GAMING SOFTWARE. Everything else is just hardware, tools, infrastructure and distribution. The delivery method is not the market. The cloud is the cloud, gaming is gaming. Fusing those two is erroneous.

Netflix Is A Perfect Example of What Microsoft Is Trying To Do In Gaming
Consider Netflix, when they saw that other media companies were preparing their own movie/tv streaming options what did they do? They began making massive investments in content. They needed exclusive IP to continue to pull in and retain subscribers.

Well Microsoft is doing exactly that by acquiring Activision Blizzard. They are setting up a gaming platform that can reach gamers wherever they are, all the time. And they want to keep them subscribed, so they are snapping up development talent and unique IP now, so 5 years down the road those very same gamers will have stayed subscribed and will view the service as essential.

The Ramifications of The CMA's Decision
The CMA is basically regulating the idea of a market that doesn't exist, in the name of preserving competition and in doing so, they are actually preventing real competition in the actual gaming market. PlayStation right now generates more revenue than Xbox and Nintendo is still selling more consoles. 

Not allowing the acquisition actually defends PlayStation's position as market leader in a well established marketplace. So on one hand the CMA is defending competition in a potential "cloud gaming" market but is destroying competition in an established market. Which market should be a priority, a quasi cloud gaming market that has no real significant financial activity or adoption? Or an established market worth over 200 billion?

The CMA Came To A Very Interesting Decision To Block This Deal
It seems like the CMA is punishing Microsoft for being willing to invest. Competitors like Apple, Amazon and Google, who could also make the same investment have decided to sit on their hands. Cloud gaming is not even mainstream and they are effectively hitting the breaks on one of the big tech companies willing to invest and advance the gaming industry. I think that's bad business.

I want to highlight, Apple, Amazon and Google all have cloud services. Sony and Nintendo both have gaming software but nobody but Microsoft has made big investments in both markets. The CMA couldn't block this by looking at it from a purely cloud services perspective or looking at it from a purely gaming software perspective. So they've decided to take a very narrow view to block it by defining a market as "cloud gaming". A so called market that the vast majority of gamers, including hardcore and casual, do not use.

The Idea That Other Companies Wouldn't Be Able To Compete In Cloud Gaming is Ludicrous
Netflix had a massive head start in streaming but Disney and HBO were able to jump right in and compete when they decided to make the investment because they had the unique content available to do so. I see no reason why other "cloud gaming" competitors couldn't do the same once they decide to make a full investment.

It's interesting to consider that if Google Stadia had not shuttered and was still active right now, the CMA likely would not have the ability to even use this "Cloud Gaming" logic to shut down this deal. It shows you just how flawed of a decision it is to break up the gaming market like that. And clearly shows that they wanted to shut this deal down from the very beginning.

It Takes A Lot of Investment To Be Profitable With Streaming
The thing is, its going to take a lot of investment. Disney+ is still not profitable and it likely won't be until 2024 at the earliest. Also, movies and tv shows are far easier to produce and release than games. What did Disney do a little over 10 years ago? They started buying up big mega IP like Star Wars and Marvel and in doing so they guaranteed themselves a huge content advantage but they are still not the only ones making movies. We still get indie movies, we still get movies from other established studios. And yes, they have a very successful streaming platform, over 100 million users but they are still not the largest and there are a ton of other streaming companies. And guess what customers subscribe to more than 1 streaming platform! Imagine that customers actually buy more than one product!

Knowing this, why would you hold back the industry? It's not like some small company is going to come along and offer 4 high quality AAA games a year to attract gamers to their service which runs on a buttery smooth cloud streaming platform. You can't centrally plan an entire market. You need the big companies to come in, that are willing to invest. And then eventually you'll have your smaller streaming services, indie developers and others that decide to take a chance and put their own unique product offering out there.

What If Microsoft Simply Agreed They Wouldn't Make Any Activision Blizzard Games Available Via Cloud For X Amount of Years?
I actually think this could be a trump card that Microsoft could play. Microsoft is currently appealing the CMA decision. But if things were to still take a turn for the worse, I think a decision like this would be very interesting. Since the only way the CMA could try to legitimately block the deal is through such a narrow focus. Microsoft could simply remove that roadblock.

Forget about Call of Duty multiplatform deals or whatever other remedies they discussed before. By committing to this, they could complete the acquisition in the UK and post all of these games to gamepass. Xbox gamepass is not the cloud. Also Xbox would still be able to post any of its other first party games to the cloud which should be substantial over time. It's cool to think about but I don't think it would actually go down this way.