The UK's Competition and Markets Authority (CMA) approved the Microsoft-Activision merger on 13 October 2023, but only after Activision divested its global cloud gaming rights to Ubisoft for 15 years, excluding the European Economic Area. This decision focused on potential monopolistic concerns in the nascent cloud gaming market, which currently accounts for just 1% of global game distribution. Despite the limited adoption of cloud gaming and failures like Google's Stadia, the CMA acted pre-emptively, fearing Microsoft's potential dominance. This precautionary approach raises questions about prudence of regulators acting on uncertain future market developments.
The Microsoft-Activision merger received approval from the United Kingdom’s Competition and Markets Authority (CMA) on 13 October 2023.[i] Initially, the CMA blocked the deal, citing concerns about a potential significant reduction in competition. Interestingly, the CMA's reservations weren't primarily about console-based gaming. Microsoft's Xbox and Sony's PlayStation dominate the global gaming hardware console market. With Sony selling four times as many PlayStations as Microsoft does Xboxes, the UK regulator believed that Microsoft had little incentive to prevent PlayStation owners from accessing Activision games. Instead, the CMA's concerns centered on cloud gaming, a format where games are streamed from data centers to a gamer's chosen device. Illustratively, the Microsoft-Activision deal was approved only after Activision divested its global cloud gaming rights (excluding the European Economic Area) for all current and upcoming games to Ubisoft for the next 15 years.[ii]
Cloud gaming allows users to access high-quality games on any device, making it an essential advancement for consumer access.[iii] It potentially liberates gamers from the constraints and costs of a console, enabling them to play on computers or mobile phones. However, the CMA might have overestimated its future significance. Illustratively, in 2022, cloud gaming accounted for just 1 percent of global game distribution.[iv]
Another point to consider is Google’s unsuccessful foray into cloud gaming. Google Stadia shut down just 11 months after its launch. Experts suggest that it offered no real advantage to serious gamers. Most people who wanted to play the games on it, such as Assassin’s Creed, already had consoles.[v] Moreover, playing on Google Stadia wasn't cheaper than on a console. Reducing its price would have made it economically unviable due to the costs of game production and cloud gaming infrastructure setup.[vi]
Cloud gaming requires a high-speed internet connection and has problems with latency, which can hinder the consumer experience considerably. For instance, testers at the Washington Post noted that Stadia had an input lag on PC gaming, a significant issue in fast-paced games.[vii] Importantly, the tests were carried out on a high-speed internet connection of 747 Mbps – close to the fastest speed available on a premium connection in India.
Given Stadia’s failure and the generally low uptake of cloud gaming at present, was the CMA justified in its fears about Microsoft foreclosing competition in a segment that might never take off? The CMA, influenced by testimonies from other cloud gaming platforms, believed cloud gaming would be "transformative for the gaming industry”.[viii] However, companies in a particular sector are unlikely to admit that they are embroiled in a doomed venture.
Moreover, in its testimony, Microsoft painted a pessimistic picture of cloud gaming, highlighting the uncertainty of adoption, the difficulty of customer retention, and the problems associated with latency. However, according to the CMA, Microsoft’s internal documents point to a sanguinity about cloud gaming, including plans for further expansion of projects related to the format. While Microsoft noted that these plans were made before the problems with cloud gaming came to the fore, the CMA references more recent communications that presumably indicated otherwise. It is hard to wholly deconstruct the CMA’s thought process as most of the information it references has been redacted to preserve confidentiality. However, what is clear is that while Microsoft’s internal documents also pointed to the limitations related to cloud gaming, the CMA chose to believe that this did not indicate that the sector would not grow.
Once it decided that cloud gaming had a future, the CMA built a case around how Microsoft had the capability not only overcome the challenges faced by Google Stadia but also monopolise this segment. The CMA noted that Microsoft already account for 40-50 percent of the cloud gaming market.[ix] Further, Microsoft had several assets which potentially gave it a competitive edge over rivals such as control over multiple operating systems which already had a wide library of compatible games.[x] In contrast, there was a high cost associated with porting games to rival operating software like Linux, which is what Google Stadia was built on.[xi] The CMA noted that Google’s decision to build Stadia on Linux limited its access to games for this reason, and thus may have contributed to its failure.[xii] In addition, third party evidence indicated that technical difficulties experienced with cloud gaming, such as latency and the input lag that was prevalent in Google Stadia, were likely to be resolved soon.[xiii]
Only time will tell whether the CMA’s predictions for cloud gaming hold up. At the moment, its actions come off as precautionary – blocking a transaction to stave off the remote possibility of anti-competitive outcomes in the future. Given the extent of uncertainty around the future trajectory of any technology, is it prudent for a regulator to act and think so pre-emptively? It is uncertain, for instance, whether cloud gaming will take off, just as much as it is uncertain that Call of Duty, a popular Activision game which most of the CMA’s concerns hinged on, will be relevant 10 years from now. In that context, the divestiture of Activision’s cloud gaming rights to Ubisoft may mean very little.
A key trend in precautionary antitrust, particularly in matters related to digital technology is the narrowing of relevant markets. The CMA took this trend to an absurd apogee by narrowing the relevant market to a potential non-sector, in a bid to block a deal which may very likely have been an attempt by Microsoft to be more competitive in the mainstream gaming market of PCs and consoles. In a sense, it was equivalent to a competition regulator blocking Uber from purchasing a leading flying car maker, because some in the industry believe flying cars are the future of transportation. Whether this is true is not something we can know for sure, and the same goes for the future of cloud gaming. The larger question, to borrow from Donald Rumsfeld, is whether it is prudent for regulators have unknown unknowns (things they don’t know they don’t know) guide their decisions.
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[iv] https://ec.europa.eu/commission/presscorner/detail/en/ip_23_2705
[v] https://www.theguardian.com/games/2022/oct/04/google-stadia-is-going-offline-for-good
[vi] https://www.theguardian.com/games/2022/oct/04/google-stadia-is-going-offline-for-good
[vii] https://www.youtube.com/watch?v=o6pf988yFSc
[xiii] https://assets.publishing.service.gov.uk/media/644939aa529eda000c3b0525/
Microsoft_Activision_Final_Report_.pdf, Pg 250, Para 8.240