UK watchdog’s block on Microsoft-Activision deal had an eye on the future
It is rare for a decision by the UK’s competition regulator to make waves globally.
The Competition & Markets Authority (CMA) has traditionally not been as significant a force in preventing corporate deals as the European Commission or the US Federal Trade Commission.
So the CMA’s decision to block Microsoft’s $75bn takeover of the games publisher Activision Blizzard is one of its most far-reaching decisions in years.
It is also huge for a sector – video gaming – that is of more importance to the UK and to the global economy than is widely appreciated.
This was the biggest acquisition in Microsoft‘s history – and the CMA’s intervention may yet scupper the deal.
It has sent Activision shares down more than 11% in pre-market trading.
The decision has come as a surprise for a couple of reasons. The first is that the CMA has not blocked the decision due to concerns over the competition in the supply of games consoles.
Microsoft had pledged to make Call of Duty available on other platforms for at least a decade to satisfy regulators’ early concerns
This was of particular importance in the UK. Elsewhere around the world, in particular the US, playing games on large PCs is commonplace.
The UK, by contrast, is not a nation of PC players but one of console players. This reflects the fact that UK housing is smaller, typically, than in the US and so British gamers are more likely to play on consoles that can easily be fitted under a TV set and take up less space.
Consoles like Microsoft’s Xbox and Sony’s PlayStation are therefore a more important factor in the UK gaming market than in the US one.
The concern was that armed with Activision’s big money-spinning titles, chiefly Call of Duty, World of Warcraft and Overwatch, Microsoft would have had plenty of scope to hurt PlayStation sales were it to make games exclusive only to the Xbox.
It was seen as particularly significant for the CMA in view of the fact that in the UK, more gamers own a PlayStation 5 than own an Xbox series X or its cheaper sister product, the Xbox series S.
But the CMA said last month it had provisionally concluded that the merger would not result in a substantial lessening of competition in console gaming services “because the cost to Microsoft of withholding Call of Duty from PlayStation would outweigh any gains from taking such action”.
Accordingly, as this was the main area in which the CMA was expected to have competition concerns, it is surprising that the regulator has decided to block the takeover.
The other big surprise is that the ground on which the CMA wants to block the proposed deal is that it would potentially reduce competition in the cloud gaming sector.
This is because the cloud is at present a relatively small part of the way in which video games are played currently.
But it is already a field in which Microsoft has established a lead over Sony and that may well be of concern to the CMA – particularly given Microsoft’s wider market dominance in cloud services (another market the CMA is investigating separately) and given the work Microsoft is doing to deliver many of the services available through Gamepass, its subscription service, through the cloud.
The CMA has clearly made this decision with an eye to the future.
The CMA’s intervention may not be enough to kill this deal.
Microsoft and Activision may find a way of offering remedies to satisfy it, but the size and the complexity of the global gaming market would probably make it too complicated for Microsoft and Activision to unpick it in a way that the UK remained excluded from a tie-up elsewhere around the world.
But there are also competition hurdles elsewhere, particularly the US, where the FTC has said it will sue to block the deal.
And, in other jurisdictions, concerns over competition in consoles may well be a factor. Microsoft has insisted throughout that it has no intention of making Activision’s games exclusive to Xbox, Gamepass and to PCs.
But other watchdogs may choose to consider an interview given last month by Harvey Smith, the director of a game called Redfall, which is published by Bethesda Softworks, a company bought by Microsoft in 2021. The development of Redfall was interrupted by the pandemic, during which, Microsoft bought Bethesda.
Mr Smith told the US video game and entertainment website IGN that, originally, Redfall was to be released on all platforms but that there was a “huge change” once Microsoft bought Bethesda.
He told IGN that, even though work had been started to make a PlayStation version of Redfall, Microsoft had cancelled that work in order to make it exclusive to Xbox.
He said: “We were acquired by Microsoft and it was a capital C change. They came in and said, ‘No PlayStation 5, we’re focusing on Xbox, PC and Game Pass’.”
That interview has already been flagged by Sony in some of its representations to competition watchdogs.
The CMA’s ruling will be music to Sony’s ears. Pic: AP
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A key point to bear in mind is that Microsoft is doing well enough – last night’s quarterly results showed a business firing on all cylinders – for it not to need Activision.
That may not be true for the latter which, shortly before the takeover was announced, was beset by allegations of sexual assault and mistreatment of women at the company in recent years.
That may explain the vituperative response of Bobby Kotick, Activision’s chief executive, to today’s decision. Mr Kotick, who stands to make millions from a sale of the company, has previously accused the CMA of being “co-opted by FTC ideology”.
Bobby Kotick has reacted angrily to the CMA’s decision
He has, though, been careful to praise Rishi Sunak, telling the Financial Times in February this year that the PM was “smart” and understands business, adding: “If I look at our hiring plans, we’re more likely to find the next 3,000 to 5,000 people that we need in the UK than almost any other country.”
That was very much at odds with his assertion today that “the UK is clearly closed for business”.
Some will dismiss that as a man lashing out in disappointment.
Others will view it as a threat.
The UK economy unexpectedly shrank in May, even after the worst of Donald Trump’s tariffs were paused, official figures showed.
A standard measure of economic growth, gross domestic product (GDP), contracted 0.1% in May, according to the Office for National Statistics (ONS).
Rather than a fall being anticipated, growth of 0.1% was forecast by economists polled by Reuters as big falls in production and construction were seen.
It followed a 0.3% contraction in April, when Mr Trump announced his country-specific tariffs and sparked a global trade war.
A 90-day pause on these import taxes, which has been extended, allowed more normality to resume.
This was borne out by other figures released by the ONS on Friday.
Exports to the United States rose £300m but “remained relatively low” following a “substantial decrease” in April, the data said.
Overall, there was a “large rise in goods imports and a fall in goods exports”.
A ‘disappointing’ but mixed picture
It’s “disappointing” news, Chancellor Rachel Reeves said. She and the government as a whole have repeatedly said growing the economy was their number one priority.
“I am determined to kickstart economic growth and deliver on that promise”, she added.
But the picture was not all bad.
Growth recorded in March was revised upwards, further indicating that companies invested to prepare for tariffs. Rather than GDP of 0.2%, the ONS said on Friday the figure was actually 0.4%.
It showed businesses moved forward activity to be ready for the extra taxes. Businesses were hit with higher employer national insurance contributions in April.
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The expansion in March means the economy still grew when the three months are looked at together.
While an interest rate cut in August had already been expected, investors upped their bets of a 0.25 percentage point fall in the Bank of England’s base interest rate.
Such a cut would bring down the rate to 4% and make borrowing cheaper.
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Analysts from economic research firm Pantheon Macro said the data was not as bad as it looked.
“The size of the manufacturing drop looks erratic to us and should partly unwind… There are signs that GDP growth can rebound in June”, said Pantheon’s chief UK economist, Rob Wood.
Why did the economy shrink?
The drops in manufacturing came mostly due to slowed car-making, less oil and gas extraction and the pharmaceutical industry.
The fall was not larger because the services industry – the largest part of the economy – expanded, with law firms and computer programmers having a good month.
It made up for a “very weak” month for retailers, the ONS said.
Monthly Gross Domestic Product (GDP) figures are volatile and, on their own, don’t tell us much.
However, the picture emerging a year since the election of the Labour government is not hugely comforting.
This is a government that promised to turbocharge economic growth, the key to improving livelihoods and the public finances. Instead, the economy is mainly flatlining.
Output shrank in May by 0.1%. That followed a 0.3% drop in April.
Ministers were celebrating a few months ago as data showed the economy grew by 0.7% in the first quarter.
Hangover from artificial growth
However, the subsequent data has shown us that much of that growth was artificial, with businesses racing to get orders out of the door to beat the possible introduction of tariffs. Property transactions were also brought forward to beat stamp duty changes.
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In April, we experienced the hangover as orders and industrial output dropped. Services also struggled as demand for legal and conveyancing services dropped after the stamp duty changes.
Many of those distortions have now been smoothed out, but the manufacturing sector still struggled in May.
Signs of recovery
Manufacturing output fell by 1% in May, but more up-to-date data suggests the sector is recovering.
“We expect both cars and pharma output to improve as the UK-US trade deal comes into force and the volatility unwinds,” economists at Pantheon Macroeconomics said.
Meanwhile, the services sector eked out growth of 0.1%.
A 2.7% month-to-month fall in retail sales suppressed growth in the sector, but that should improve with hot weather likely to boost demand at restaurants and pubs.
Struggles ahead
It is unlikely, however, to massively shift the dial for the economy, the kind of shift the Labour government has promised and needs in order to give it some breathing room against its fiscal rules.
The economy remains fragile, and there are risks and traps lurking around the corner.
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Concerns that the chancellor, Rachel Reeves, is considering tax hikes could weigh on consumer confidence, at a time when businesses are already scaling back hiring because of national insurance tax hikes.
Inflation is also expected to climb in the second half of the year, further weighing on consumers and businesses.
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