UK’s Microsoft-Activision veto should alarm tech companies and EU merger regulator

Microsoft saw its acquisition of Activision Blizzard vetoed by the UK's merger regulator today in a move that underlines its skepticism of behavioral remedies — and one that ought to set alarm bells ringing at other tech companies, especially Broadcom.

Comments by the Competition and Markets Authority’s about a remedy that was sufficient for EU regulators will also further widen the gap between the two neighboring jurisdictions.

In blocking the $69 billion transaction, the CMA said the deal would “alter the future” of the “fast-growing” cloud gaming market, leading to less innovation and choice.

Microsoft would find it “commercially beneficial” to make Activision Blizzard’s games exclusive to its own cloud gaming service, the watchdog said — even though Microsoft has signed agreements to make games such as Call of Duty available on at least three rival platforms.

Microsoft already has a strong position in the market with a market share of 60 to 70 percent and gains an important advantage in the market through its broader portfolio which includes the Xbox game console, Windows PC operating system and Azure and Xbox cloud computing infrastructure.

That’s ominous for other Big Tech companies at a time when regulators are increasingly advancing theories of harm about large companies expanding their “ecosystems” that can be incredibly complex to resolve.

Global pushback

Regulators around the world are increasingly putting their foot down when it comes to behavioral remedies — where companies pledge to act in a certain way if their merger is approved — saying that in increasingly complex markets, asset sales, or even vetoes, are the preferred option.

The CMA is at the forefront of this school of thought, rejecting behavioral remedies in deals such as Facebook owner Meta Platforms' acquisition of Giphy and Sabre’s takeover of Farelogix.

Examples of it accepting them are few and far between. Two recent examples are Bouygues' acquisition of Equans in 2022 and Bauer Media Group’s acquisition of several radio businesses in 2020.

In February, the CMA’s chief executive, Sarah Cardell, explained that the “bar” for behavioral remedies was “high” as they don’t typically address the underlying causes of competition problems arising from mergers, and they can be challenging to design.

One problem is that behavioral promises can become ineffective or circumvented as markets change, another is that they can be very difficult to monitor and implement, she said. If arbitration mechanisms such as monitoring trustees don’t work, the CMA can end up as a “referee,” she warned.

Two years earlier the watchdog signed a statement with counterparts in Germany and Australia that similarly set out its critical view on behavioral remedies.

Microsoft’s shortcomings

A significant chunk of the CMA’s press release today centers on why Microsoft’s proposal to supply Activision content to other cloud gaming services such as Nvidia, Boosteroid and Ubitus fell short.

The CMA examined the proposal in “considerable depth” but found it had “significant shortcomings” related to the “growing and fast-moving nature of cloud gaming services.”

Specifically, it said the offer didn’t cover different models of cloud gaming services such as multigame-subscription services, and wasn’t open to providers wanting to offer games on PC operating systems other than Windows.

Microsoft’s offer would also standardize the terms and conditions on which games are available, rather than them being determined by “the dynamism and creativity of competition in the market.”

“Given the remedy applies only to a defined set of Activision games, which can be streamed only in a defined set of cloud gaming services, provided they are purchased in a defined set of online stores, there are significant risks of disagreement and conflict between Microsoft and cloud gaming service providers, particularly over a 10-year period in a rapidly changing market.”

It would also require regulatory oversight from the CMA — which blocking the merger did not.

Behavioral remedies

In today’s press release, the enforcer made clear its skepticism of behavioral remedies.

In general, behavioral remedies seek to regulate the businesses of companies, requiring them to behave “in a way which may be contrary to their commercial incentives,” the CMA reasoned.

“This therefore takes the form of a type of ongoing regulation of the sector, replacing market forces in a growing and dynamic market with mandated regulatory obligations ultimately overseen, and enforced by, the CMA — in this case at a global level.”

That would appear to place the bar for the CMA accepting behavioral remedies very high.

Next in line

Take the example of Broadcom’s acquisition of VMware.

In opening an in-depth probe into the deal last month, the CMA said it was concerned the Broadcom-VMware combo could harm rival hardware suppliers by hampering the interoperability of their products with VMware’s server virtualization software. It also said the merged entity could gain commercially sensitive information that its rivals currently supply to VMware.

While Broadcom has thus far argued that it wouldn’t have the ability or incentive to foreclose rivals, if push comes to shove, the company might consider offering some behavioral commitments, such as promises not to compromise rivals’ products’ interoperability with VMware’s software in the future. It could offer to build in firewalls to prevent the spillover of commercially-sensitive information.

It's hard to see how the UK regulator could be satisfied with behavioral promises after today's announcement.

Microsoft and Activision have already said they'll appeal, and it’s almost certain that the UK’s Competition Appeal Tribunal will be asked to weigh in on the CMA’s approach to remedies. Overturning a CMA decision at the CAT is extremely difficult, however.

Broadcom, Amazon — which is in the process of acquiring iRobot — and other large tech companies, but also stock exchanges, biotechs, chipmakers and many other global companies will be watching closely.

*Additional reporting by Natalie McNelis.