October 3, 2023

Britain’s antitrust regulator on Wednesday blocked Microsoft’s planned $69 billion takeover of video game giant Activision Blizzard, a major hurdle in the biggest consumer technology acquisition since AOL’s purchase of Time Warner 20 years ago.

UK Competition and Markets Authority said in a statement Microsoft’s settlement proposal “fails to effectively address concerns in the cloud gaming space.” Cloud gaming is an emerging technology that allows people to stream games to their devices, avoiding the need for hardware such as gaming consoles.

Martin Coleman, chairman of the panel conducting the investigation for the CMA, said: “Microsoft already enjoys a strong position in cloud gaming, ahead of its competitors, and this deal will strengthen that advantage and give it the ability to weaken new and innovative competitors,” he said in a statement.

The announcement supports the FTC’s efforts to block the takeover. Microsoft had hoped to weaken FTC Chairman Lina Khan’s challenge to the deal by reaching a settlement with the U.K. regulator and its EU counterpart.

Despite growing government scrutiny, the U.K. decision is a red flag for big tech companies trying to make big deals. In recent years, lawmakers and regulators have threatened a series of measures to rein in companies like Microsoft, Amazon, Apple, Google and Facebook owner Meta, which they say have too much influence over culture, communications and commerce.

Microsoft said it would appeal the ruling.

“We are particularly disappointed that, after lengthy deliberation, this decision appears to reflect a misunderstanding of how this market and related cloud technologies actually work,” Microsoft President Brad Smith said in a statement.

Activision, the publisher of popular games such as Call of Duty, said it would “actively cooperate” with Microsoft to overturn the ruling.

“If the CMA’s decision stands, it will kill investment, competition and job creation across the UK games industry,” said Activision chief executive Bobby Kotick.

The decision is a boon for FTC Chairwoman Khan, who has made the challenging merger a central part of her attempt to rein in the power of major tech companies. The agency’s opposition to Microsoft’s massive deal is the most prominent challenge it has faced in tech industry consolidation after trying to block Meta from buying a virtual reality startup failed.

“If we look at the entire portfolio of work they’re doing now related to mergers, this one is very important,” said William E. Kovacic, the agency’s former chairman. An FTC spokesman did not immediately respond to a request for comment.

Microsoft announced the deal to acquire Activision early last year, hoping to combine Microsoft’s Xbox console and video game subscription service with Activision’s blockbuster titles such as Call of Duty, World of Warcraft and Candy Crush.

At the time, Mr. Kotick faced calls to resign as Activision was hobbled by a lawsuit in California alleging it fostered a toxic, sexist workplace culture.

For more than a year, the debate about the deal has centered on what happens to the hundreds of millions of people who play Activision games. The company most vocally opposed to the deal is Sony, which makes the PlayStation game console, a rival to Microsoft’s Xbox. Sony argues that fans of Call of Duty and other Activision titles, which can currently be played on Xbox or PlayStation, will be forced to use only Microsoft’s consoles and services.

Sony did not immediately respond to a request for comment on the ruling.

Microsoft said it would not limit Call of Duty to the Xbox, arguing that the acquisition would actually give more people access to the games. It is focused on settling with regulators outside the United States to allow the deal to go through under certain conditions. It also gave the gaming platform guaranteed access to Call of Duty to show that it wouldn’t limit the popular game on other consoles.

British regulators initially said in February that the deal would harm competition on consoles such as PlayStation and the nascent cloud gaming industry, which involves using the power of remote data centers to stream games to devices such as iPhones or computers.But in late March, it reversed course, saying it No longer believe The deal poses a threat to Sony, which seems to put Microsoft in a good position.

Instead, the CMA focused its attention on the cloud gaming market, which has only been around for a few years, and on the possibility that cloud gaming could explode, eventually worth $14 billion globally and $1.3 billion in the UK by 2026 Dollar.

“The cloud removes the need for UK gamers to buy expensive gaming consoles and PCs, and gives them more flexibility and choice in how they play their games,” the CMA wrote in its ruling on Wednesday. Starting out in such a strong position for rapid growth risks undermining the innovations that are critical to the development of these opportunities.”

In recent months, Microsoft has signed several deals promising to allow Activision’s games to run on cloud streaming platforms such as Nvidia’s GeForce Now streaming service for 10 years. But those solutions don’t cover enough cloud business models, the CMA said.

“It’s a major blow to getting a deal done,” said Piers Harding-Rolls, a gaming researcher at London-based analysis firm Ampere Analysis. “It will inevitably delay things and will affect Xbox’s business plan.”

Activision shares fell more than 10% in premarket trading. Microsoft shares rose about 8% after reporting stronger-than-expected earnings on Tuesday.

Karen Weiser reports from Seattle, and adam satariano from London.

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