The European Commission's Directorate General for Competition (DG COMP) has obviously been aware of Microsoft's proposed acquisition of Activision Blizzard King for many months, but received formal notification only on September 30 (case no. M.10646). The deadline for a Phase 1 decision was today, and the Commission just announced--as everyone familiar with EU merger reviews expected--that an in-depth review (Phase 2) would be conducted, citing foreclosure concerns (more about that further below). At this point the Commission merely says that certain things "may" happen, and the purpose of the Phase 2 investigation is to better understand whether such concerns are warranted.
The in-depth review takes 90 working days (DG COMP's website states a target date of ) and can be extended by 15 days if the acquirer offers commitments that would address any potential concerns. Microsoft could already have offered commitments in Phase 1, but according to media reports, that didn't happen.
There are three reasons for which I nonetheless believe the EU will ultimately clear the transaction:
The "issues" are purely numerical, not legal.
The deal size and, even more so, the size of the acquiring party are indisputably awe-inspiring. In light of past underenforcement, it's obvious that competition "watchdogs" don't just want to wave this $69 billion purchase of a major game maker by one of the largest Big Tech players through: they must take a closer look. Parallel reviews by the U.S. Federal Trade Commission and the UK Competition & Markets Authority are also in Phase 2, meaning that fast-track clearance wasn't granted by those competition authorities either.
However, three jurisdictions have already decided that this transaction won't result in a substantial lessening of competition: Saudia Arabia, an unnamed other country (according to rumors, the United Arab Emirates), and Brazil. I summarized the Brazilian decision a month ago; it has meanwhile become final.
Microsoft's acquisition of Activision Blizzard King will further the goals of the EU's Digital Market Act (DMA).
One week ago to the day, the DMA entered into force, though its initial implementation will take until 2024--and then we will see such effects as "allowing developers to use alternative in-app payment systems or allowing end users to download alternative app stores" (emphasis added). In order for third-party app stores to gain traction and to overcome the Power of Default, such new app distribution channels will need to attract many end users. That's why Microsoft told the UK CMA that it needs Activision Blizzard's mobile games in order to be able to compete with Apple's and Google's app stores (of course, provided that those gatekeepers must allow alternative app stores to succeed, but the DMA can open the door).
As an app developer who filed his own complaints over Apple's and Google's app distribution rules, I can't think of a more pressing problem to be solved than developers' access to billions of mobile device users. Last month, Epic Games' CEO Tim Sweeney tweeted that he'd gladly let an iOS version of his Epic Games Store compete with Apple's App Store as well as with a Microsoft app store on iOS, and then John Gruber ("the King of the Apple Geeks" and aligned with Apple approximately 95% of the time) surprisingly said "Microsoft would be great."
If we--I mean app developers like me as well as app users, which we all are--want healthy competition in the app distribution business, it takes two things. First, legislative measures like the DMA, regulatory intervention such as the ongoing DG COMP investigation of the Google Play Store, and litigation (in less than a week, the Ninth Circuit will hear Epic v. Apple--same judges as originally assigned) must do away with restrictions that result from and perpetuate a market failure. Second, market forces must enable alternative app stores to get traction, and that's where Activision Blizzard King (ABK) comes in.
Just yesterday, ABK announced its latest numbers, which according to Bloomberg beat estimates "boosted by mobile games." Microsoft has been saying for at least a few months now that this deal is very much about mobile.
As a developer who considers the current state of affairs in mobile app distribution unsustainable, I don't know whether I may in the end submit apps to the platform's default stores (who may become much more developer-friendly in the face of real competition), an Epic Games Store, a Microsoft Xbox Store, or whatever combination. But like Apple fan John Gruber and Epic founder Tim Sweeney, I would consider Microsoft a very important new entrant, provided they have a powerful array of mobile games. As smaller app developers, we need stores operated by big players in whose security and privacy promises consumers will trust--and who can get a high percentage of all smartphone users to register. Otherwise, we're still going to be dependent on Apple and Google.
It would be the combination of Microsoft apps like Skype, Teams, and Outlook with ABK's games that would enable a new app store to attract a user base that will make a difference in the market.
The only companies known to oppose Microsoft-ActivisionBlizzard are Sony--which alleges that Microsoft wants to make Activision's Call of Duty an Xbox-only title to take market share away from the PlayStation--and Google, which paid two dozen game makers including Activision Blizzard hundreds of millions of dollars to ensure their loyalty to the Google Play Store.
Interesting, both Google (with its "Project Hug") and Sony seem mostly concerned that a Microsoft-owned Activision Blizzard will no longer do certain deals with them that are not in the interest of consumers. The latest Call of Duty title that just launched--Modern Warfare II--comes with a host of PlayStation-exclusive benefits, some of which--oh, the irony--distort competition between gamers as PlayStation users will make progress more quickly than Xbox users.
On the subject of irony, it became known just yesterday that Final Fantasy XVI (by Square Enix) will be a PlayStation 5 exclusive for at least six months:
According to a new PlayStation 5 video, Final Fantasy XVI is PS5 exclusive for at least 6 months https://t.co/3mHCrGiXzS pic.twitter.com/ygkK0s9Dq7
— Wario64 (@Wario64) November 7, 2022
Competition enforcers would set a strange precedent if they blocked an acquisition only because a market leader--Sony--is worried that the margin by which it leads might be reduced. Sony can't even credibly claim that CoD has the power to deprive it of market leadership: even if all PlayStation users who play CoD migrated to the Xbox, Sony would still be number one, and comfortably so. A bipartisan U.S. think tank has explained that it wouldn't make economic sense for Microsoft to leverage CoD against the PlayStation. And in recent months, Microsoft's gaming chief Phil Spencer has said over and over that CoD will remain available as a PlayStation title. In the most recent interview, he even said that Microsoft will offer CoD for the PlayStation as long as there is a PlayStation:
On Sunday, the New York Post claimed that Activision Blizzard insiders were increasingly worried about the possibility of the deal falling through. The sources--who must be on the other coast--aren't named. To me it just looks like some investors--possibly shortsellers who hope to drive the stock price further down so they can realize some quick gains (potentially before "going long" at a later stage)--influenced the NY Post. If the current level of regulatory scrutiny is so much of a surprise, why did the parties tell investors from the beginning that the deal would close only in mid-2023 or so?
Having followed other merger reviews, everything so far looks like the normal course of business to me. I wouldn't read too much into the fact that Microsoft didn't offer commitments during the Phase 1 reviews in the EU and the UK. They were merely being consistent: if your position is that there is no legally defensible basis for blocking your deal, why would you offer commitments at that early stage? I have no idea what they will do, and the New York Post doesn't know it either: those processes are pretty dynamic. For the EC, the next major milestone is a potential Statement of Objections (SO), which is a preliminary decision. I don't think anybody can know today whether Microsoft would actually offer some commitment like keeping CoD on the PlayStation (which they've publicly promised to do anyway) in order to avoid an SO, or after an SO.
I still consider this a case for unconditional clearance, but wouldn't be surprised if EU competition chief Margrethe Vestager and Microsoft worked out a conditional approval. It's too early to tell. What I know is that Mrs. Vestager has a better track record defending her decisions in court than her counterparts in some other jurisdictions, so in the end I believe the case will simply be decided on the merits.
