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UK blocks Microsoft bid for Activision in blow to tech giants

Britain’s antitrust watchdog dealt a major setback to Microsoft’s planned $69 billion takeover of video game giant Activision Blizzard on Wednesday, blocking the proposed deal and handing government enforcers looking to rein in big tech companies a notable victory.

The Competition and Markets Authority has dealt a potentially fatal blow to a nascent part of the gaming industry when it decided that Microsoft’s proposal to ensure the acquisition would not harm competition “failed to effectively address concerns in the cloud gaming space”. It’s the biggest consumer tech acquisition since AOL bought Time Warner 20 years ago.

The surprising ruling was a clear victory for those who support regulation of tech giants including Microsoft, Amazon, Apple, Google and Facebook parent Meta. Their efforts have been hampered by recent court and legislative failures in the United States over concerns that the companies have too much power over online commerce and communications.

“This is a very big win for the broader effort to refocus antitrust enforcement,” said William E. Kovacic, a former chairman of the FTC. Microsoft said it plans to appeal the ruling.

Much of the focus around whether consumers would be harmed by the deal has focused on the expensive gaming console market, but the CMA in its ruling focused on cloud gaming, a relatively new technology that allows people to Stream games to their devices, circumventing the need for hardware like gaming consoles.

The British agency’s statement supports the efforts of FTC Chairman Lina Khan, who has made challenging mergers a central part of her plan to take control of the tech giants. After the US agency filed a lawsuit in December to block the video game deal, Microsoft quickly tried to isolate Ms Khan by pushing UK and European authorities to a legal settlement that would address their concerns and allow the deal to go through. EU antitrust regulators are still reviewing the acquisition and are expected to issue a ruling on May 22.

But British officials have instead suggested that the era of easy blockbuster deals for tech giants is over. The FTC is filing an antitrust lawsuit against Amazon, and Ms. Khan said she was watching closely to see if the tech giant could abuse its power in the race to develop artificial intelligence tools.

On Wednesday, the U.S. Federal Trade Commission said it was in line with U.K. regulators. “As explained in our complaint, we are also concerned about the anti-competitive effects of this deal,” Holly Vidova, director of the agency’s competition bureau, said in a statement.

“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.

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

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 originally 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 considered the deal a threat to Sony, which seemed to put Microsoft in a good position.

Instead, the CMA focuses on the cloud gaming market, which has existed for just a few years, and on the possibility that cloud gaming could explode in popularity, eventually worth $1.3 billion in the UK and $14 billion globally by 2026 .

“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. Taking such a strong position as we embark on rapid growth risks undermining the innovations that are critical to the development of these opportunities.”

In the future, cloud gaming could untether gamers from their consoles and shift the focus from hardware to technology that allows games to be streamed from remote data centers. Paired with Xbox Game Pass, Microsoft’s monthly game subscription service with more than 25 million subscribers, it could be a powerful tool. But it’s not yet widely adopted, and early forays into cloud gaming from companies like Microsoft, Google, and Amazon have struggled. The technology still suffers from frequent glitches and requires a strong Wi-Fi connection.

“In the long run, cloud gaming could be very big, but that would require a massive shift in how games are made and sold,” said David Gibson, a senior analyst at Australian financial services firm MST Financial.

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.

The agency said that with the rise of cloud gaming, Microsoft already has a significant advantage, accounting for 60% to 70% of global cloud gaming services. If the deal goes through, Microsoft could benefit from giving Activision’s games exclusive to its own cloud gaming platform, Xbox Cloud Gaming, which could hurt consumers, the CMA said.

“This deal will strengthen that advantage, giving it the ability to undercut new and innovative competitors,” Martin Coleman, chairman of the panel conducting the investigation for the CMA, said in a statement.

The setback will now force Microsoft to appeal the ruling. It had previously said it hoped to complete the acquisition by July 18.

The appeals process may be relatively quick, but Microsoft must meet a high bar: According to CMA law professor Pablo Ibáñez Colomo, the courts that oversee appeals look primarily at the CMA’s rulings for legality and reasonableness. London School of Economics.

“It’s a major blow to getting a deal done,” said Piers Harding-Rawls, a gaming researcher at Ampere Analysis in London. “This will inevitably delay things and will affect Xbox’s business plans.”

Karen Weiser reports from Seattle, and adam satariano and Michael J. de la Merced from London.

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