Vibes-based antitrust hits Microsoft

The company's Activision Blizzard merger might once have sailed through — but times have changed

Apr 28, 2023

(Hakan Nural / Getty Images)

Today, let’s talk about a decision that could scuttle Microsoft’s planned $69 billion acquisition of Activision Blizzard, and what it tells us about the prospect of giants making big purchases again any time soon.

I’ve always been a little skeptical that Microsoft could get this deal over the finish line. In January 2022, when it was first announced, I noted that even as global antitrust laws remain largely unchanged, regulators’ attitudes toward tech companies have grown markedly different.

Under a pre-2016 understanding of Big Tech, Microsoft’s mega-purchase might have sailed through the regulatory process. More recently, though, rigorous, metrics-based analyses of market size and definition, or barriers to entry, have faded in favor of what you could call vibes-based antitrust: a broad-based suspicion that the richest tech companies are too big already, and even minor efforts to expand through acquisitions cannot be tolerated — even if the alleged harm is more theoretical than actual.

How else to explain recent regulatory efforts to block Meta from acquiring the moribund GIF search engine Giphy, or the makers of the modestly successful VR workout app Supernatural? No one can credibly argue that a library of GIFs or relatively small development team will prove decisive in Meta maintaining its dominance in social networking — and in fact, the Federal Trade Commission lost its effort to block the Supernatural purchase.

But the United Kingdom’s antitrust watchdog, the Competition and Markets Authority, somehow did block Meta from acquiring Giphy. And as of this week, it may have ruined Microsoft’s plans as well. Here’s the DealBook team in the New York Times:

Britain’s mergers regulator on Wednesday blocked Microsoft’s $69 billion takeover bid for Activision Blizzard, ruling that buying the maker of “Call of Duty” would give the tech giant too much control of the thriving market for cloud-based video games.
The decision — which surprised many investors after the Competition Markets Authority narrowed the focus of its inquiry earlier this month — poses a serious hurdle for the deal, which already faces opposition from the F.T.C. and is under scrutiny by the E.U. Shares in Activision tumbled 12 percent in premarket trading, while Microsoft’s stock was up almost 8 percent after a solid earnings report.

Microsoft plans to appeal.

The CMA is the second big regulator to sue over the deal, following the FTC in December. The FTC argued that acquiring Activision and its stable of hugely popular games — Call of Duty, Diablo, and Overwatch among them — could harm the market if Microsoft decided to stop making those titles available to rivals like Sony and Nintendo. And assuming that future gamers will stream games from the cloud rather than downloading them or buying them on discs, the FTC said, Microsoft hoarding more of the most valuable intellectual properties could raise barriers for others to compete.

It’s that second objection — that acquiring Activision risks making Microsoft too dominant in cloud gaming — that forms the core of the CMA’s argument against the deal. And it surprised observers, Cecilia D’Anastasio reports at Bloomberg:

Analysts were baffled that concerns over the evolution of cloud-based play could prove fatal to the biggest-ever deal in gaming. After three years, Alphabet Inc.’s Google shuttered its Stadia cloud-gaming offering in January, while Amazon.com Inc.’s Luna has seen dozens of games leave its subscription service.
Regulators more often focus on deals that threaten competition in mature, developed markets. But the UK action Wednesday reflects a growing emphasis on deals that could impede rivalry in the future.

On one hand, Microsoft really is the dominant player in cloud gaming. To the extent that acquiring Activision helps it build that cloud business, the deal really is anti-competitive.

But as Sean Hollister notes at The Verge, Microsoft’s dominance there has as much to do with its competitors’ failures than any anti-competitive behavior on its part.

“Microsoft is being punished because Google Stadia utterly failed, because Amazon Luna went nowhere fast, because Sony got distracted, because Nvidia can’t stream your own purchased games to you without negotiating with every publisher and developer under the sun,” he writes. While Hollister has his reservations about the deal, he thinks it might have jump-started cloud gaming, since the concessions Microsoft was prepared to offer arguably would have incentivized much more investment in the space.

Meanwhile, Microsoft is a distant third in the market for console games, behind Sony and Nintendo. If antitrust regulators looked at cloud and console gaming as one market, as Ben Thompson argues the CMA should have, Microsoft looks less like a giant extending its dominance than it does a third-place player working to catch up.

That helps explain Microsoft’s deep frustration with the CMA this week. The company’s president, Brad Smith, called the regulator’s decision “bad for Britain” and said it represented Microsoft’s "darkest day” in its four decades operating in the United Kingdom.

Internally, Microsoft continues to put on a brave face. Phil Spencer, the head of the company’s gaming division, told employees today that the company still sees a way forward for the acquisition, Dina Bass reported at Bloomberg.

I’m not so sure. No matter how you frame it, Microsoft’s combination with Activision would be the biggest consumer tech deal since AOL merged with Time Warner. It would bring the company 400 million monthly active people who play Activision’s games — a kind of social network roughly as big as Pinterest.

All that for a company that already has a market capitalization of $2.27 trillion, the second-largest in the world behind Apple.

Microsoft and the CMA will fight this case based on the law. But it seems clear to me that the regulator’s case is a weak veneer over the real argument: that Microsoft is already more than big enough, and it if it wants to grow its stable of popular games it should develop them among the 23 studios that it already owns.

That’s a departure from the antitrust standard of the recent past. But it’s been clear for a couple of years now that Obama-era views on competition no longer hold sway. And if the CMA could block Meta from acquiring a GIF search engine, then Microsoft’s deal looks to be in very serious trouble.

Coming Friday on the podcast: Semafor’s Ben Smith joins us to talk about the end of BuzzFeed News and the Facebook era of journalism. Plus: Kevin and I discuss the disparate approaches that Drake and Grimes are taking to synthetic versions of their work.

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