After weeks of speculation and rumor that the UK’s Competition and Markets Authority (CMA) would ultimately approve the $69 billion acquisition of Activision-Blizzard by Microsoft, this morning’s ruling against the deal came as a surprise to many. But what may have been even more surprising was the object of the CMA’s ire: not Call of Duty, as many expected, but cloud gaming.
Call of Duty, and the possibility that Microsoft might make it Xbox-exclusive upon a successful acquisition, has been at the center of the merger discussion since the deal was first announced last year. But what many may not have noticed is that, at least for the UK regulator, cloud gaming has from the beginning been an equally major concern. And while the gaming giant has repeatedly promised Call of Duty to its console and PC platform rivals enough to assuage the CMA’s console market concerns, fears about Xbox’s domination of the emerging cloud market have continued simmering in the background.
With an appeal on the way that will certainly focus on Xbox’s position in cloud gaming and what that might mean for video games as we know them, let’s take a look at why the CMA is so concerned in the first place, and what might Xbox might do to satisfy its worries and get the UK’s stamp of approval on the most expensive merger in gaming history.
The Cloud Conundrum
Back in February, the CMA published a massive, 277-page report on what, exactly, it thought about the Xbox and Activision-Blizzard merger at the time. Essentially, the CMA held two “theories of harm” about what would happen if the deal went through. The first of these, and the one that got most of Xbox’s public attention, was its concern about Microsoft making Call of Duty exclusive to Xbox. But the second centered around cloud gaming.
To summarize, the CMA’s research into the current gaming landscape led it to the conclusion that cloud gaming is on the verge of being potentially transformative for gaming within the next few years, including replacing consoles entirely for some. The market has more than tripled in the UK from the start of 2021 to the end of 2022, and is forecast to be worth over £1 billion in the UK by 2026 – more than the market for recorded music. While currently cloud gaming struggles due to issues with latency and the need for an Internet connection, the CMA understands that these issues will soon be resolved enough to allow cloud gaming to truly take hold.
And when all that happens, the CMA says, Xbox will be in a prime position to dominate the market if it has Activision-Blizzard under its banner.
In fact, the CMA believes that Microsoft is already in a very strong position. First and foremost, it owns Windows, allowing it to stream games via the cloud from its own servers without having to pay extra licensing fees or adapt games to something like Linux – something that’s been historically painful for developers. In fact, the CMA specifically and repeatedly cites Google Stadia, which shut down just one month before the findings were released, as an example of this. Stadia, the CMA says, struggled for a number of reasons, but one of its main failings was a dearth of unique and new content, and that lack of content is attributable in no small part due to developer struggles to port games to Linux.
On top of that, Microsoft has both Xbox Cloud Gaming and Azure, technology that gives it “both a short-term and a longer-term solution to host cloud gaming” without the need for third-party cloud platforms. And finally, it has a massive library of games already – a critical necessity for any platform seeking mass adoption.
In one eye-opening example of Microsoft’s cloud gaming market dominance, the CMA shared two charts of cloud gaming service shares, one with data from 2021, and another from 2022. In 2021, Microsoft’s market share (via xCloud) was between 20%-30%. But in 2022, just one year later, it had skyrocketed to 60%-70%. That’s a massive increase.
If Activision-Blizzard were added to Microsoft’s stable, then, the company could easily make Call of Duty and other games like Overwatch and World of Warcraft exclusive to its own cloud gaming services, giving its own cloud platform a major advantage in an emerging market. After all – if cloud gaming takes off, how many consumers would default flock to Xbox’s cloud ecosystem if it was the only way they could play Call of Duty? Content, the CMA argues, remains king, giving Microsoft a major financial incentive to keep Call of Duty exclusive not on its consoles, but on its cloud services. But if the deal does not occur, the CMA believes Activision-Blizzard would eventually put its games on other cloud platforms soon anyway, ensuring Call of Duty remains a great equalizer on both cloud and console.
“The cloud allows UK gamers to avoid buying expensive gaming consoles and PCs and gives them much more flexibility and choice as to how they play,” the CMA wrote in its decision. “Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities.”
Cloudy Road Ahead
Over the last several months, Microsoft has been engaged in a very public campaign to make its potential acquisition of Activision-Blizzard seem more appealing to regulators, as well as the general public. But notably, it’s largely focused on the first of the CMA’s complaints – the concerns about Call of Duty exclusivity – while leaving the cloud gaming argument comparatively untouched.
To assuage fears about Call of Duty, Microsoft has offered ten-year deals for the game to multiple platforms, including those where Call of Duty isn’t currently residing. Nintendo, Steam, and yes, even Sony have gotten offers, though Sony has yet to accept the deal as doing so would likely signal support of the acquisition that the company has vehemently opposed every step of the way. What’s more, Microsoft’s numerous public comments and extensive responses to the CMA have put a heavier emphasis on Sony and the regulator’s concerns about Call of Duty console exclusivity to Xbox than they have on cloud gaming. It’s managed to demonstrate, at least to UK regulators, that it wouldn’t profit from making Call of Duty exclusive – quite the opposite in fact.
Microsoft has done some work on the cloud front. It signed a similar deal with Nvidia for cloud gaming service GeForce Now, and reportedly its olive branch to Sony would also include its rival’s cloud service via PS Plus, remedies that would theoretically assuage the CMA’s concerns about content exclusivity. That said, the CMA didn’t seem all that impressed, describing this as a “behavioural” remedy that would ultimately require constant oversight by the CMA “at a global level.”
Accepting Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA.
“Accepting Microsoft’s remedy would inevitably require some degree of regulatory oversight by the CMA,” the regulator wrote. “By contrast, preventing the merger would effectively allow market forces to continue to operate and shape the development of cloud gaming without this regulatory intervention.”
What’s more, content isn’t the only area where the CMA didn’t find Microsoft’s cloud remedies sufficient. In its preliminary findings, the CMA noted that while Microsoft was arguing that cloud gaming is currently small and consumer adoption uncertain, its internal documents painted a different, optimistic picture. What’s more, the CMA said the company historically has yet to make many of its games available on other cloud platforms, indicating a lack of interest in doing so more broadly. The CMA believes that Microsoft would be incentivized to raise the price of Game Pass post-merger to reflect the addition of Call of Duty and other games.
And in its final ruling, the CMA did not find Microsoft’s remedies sufficient. It has outstanding concerns around Microsoft’s ownership of Windows and the trouble with Linux, its coverage of different cloud gaming service business models, and worries about the potential standardization of terms and conditions under which games would be available.
All of this sounds pretty rough for Microsoft, but it’s not over yet. The company has announced its intention to appeal, and while there are numerous factors that will contribute to how that ultimately plays out, there are reasons to think it might still win. For one, multiple cloud gaming companies have voiced support of the deal, including Nvidia’s thanks to the aforementioned ten-year-deal, and the smaller cloud gaming platform Boosteroid. While not a guarantee of success, having vocal support from competitors could be a key factor in appeals – though it’s likely Sony will continue its opposition in the cloud gaming sector as it did in console.
Experts, too, are unconvinced this is the end of the deal. Multiple analysts have weighed in already in a VGC analysis, including Ampere Analysis’ Piers Harding-Rolls, who said the CMA threw “a wrench into the process, but the deal isn’t dead.” That said, Xbox may need to make even more concessions than it already has to please the CMA. For instance, it might sign more ten-year Call of Duty deals with cloud rivals such as Amazon, it could commit to a set price for Game Pass, or it could make sweeping changes to how it handles Windows OC licenses or porting to Linux.
There is substantial doubt as to whether Microsoft is positioned to take a dominant role in [cloud gaming], with or without [Call of Duty].
“Ultimately, the ruling hinges on the CMA’s belief that Microsoft will have pricing power due to its market dominance in cloud gaming,” Harding-Rolls said. “We think that the CMA’s belief is correct, and Microsoft erred in not addressing this issue before the CMA’s ruling. However, we firmly believe that Microsoft is willing to concede maintaining pricing at $15 per month plus inflation, and we believe the CMA will reverse its position if Microsoft makes that offer.”
Harding-Rolls isn’t alone in this belief, either. While he’s previously been skeptical the acquisition will complete due to the sheer cost and effort involved, Gamma Law’s David B. Hoppe has also acknowledged he suspects Microsoft will prevail in the end. Following today’s ruling, Hoppe suggested that the CMA “sort of cherry-picked” some of its arguments to support the position of Microsoft already being dominant in cloud gaming, noting that cloud gaming was still a bit of a dicey market segment to begin with.
“Given recent failures of high-profile cloud-based platforms like Stadia, I think there is substantial doubt as to whether Microsoft is positioned to take a dominant role in this space, with or without [Call of Duty],” he explained.
Ultimately, it’s still a long road ahead both for Microsoft and for all those watching the deal’s eventual impact on the games industry. With an FTC hearing in the US still slated for August and the CMA’s process likely to last through the rest of 2023, the industry will have to keep waiting to find out the true impact of Microsoft and Activision-Blizzard’s attempted merger on consoles, Call of Duty, cloud gaming, and everything else.
Rebekah Valentine is a news reporter for IGN. You can find her on Twitter @duckvalentine.
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