January 24th 2022
Microsoft could soon be thrown back into the harsh glare of EU antitrust scrutiny, something the company has largely escaped over the past decade despite an intense regulatory focus on Big Tech giants.
Microsoft’s $68.7 billion deal to buy video-game firm Activision Blizzard — the Redmond, Washington-based company’s biggest acquisition ever — is likely to face vigorous competition reviews in Europe as well as the U.S.
The massive all-cash takeover comes as enforcers around the world are increasingly flexing their muscles over Big Tech deals. Microsoft, despite its size and a string of recent acquisitions, hasn’t been in the antitrust crosshairs in recent years, attracting much less scrutiny than the likes of Google and Facebook. That is, until now.
“With this deal, Microsoft is climbing up the antitrust ladder again,” said Björn Herbers, a competition lawyer at law firm CMS.
Analysts and competition experts expect the deal to undergo extensive antitrust scrutiny. But don’t expect a clash similar to the one between Brussels and Microsoft at the turn of the century, when the EU found that the tech giant abused its dominant position. That decision sparked a years-long standoff that became the biggest antitrust fight of the time and included some hefty fines for Microsoft.
Competition lawyers and experts say the Activision case would be very different, as the competitive landscape has changed dramatically. Microsoft is different too, having altered its approach to regulators long ago.
“Its past bruising antitrust experiences mean that it’s now more constructive than other big tech firms when dealing with regulators,” said Zach Meyers, a senior research fellow at the Centre for European Reform.
Microsoft has over the past years reappeared on the radar of EU antitrust officials following complaints from communications platform Slack and German file-hosting service Nextcloud, which both argued that Microsoft was illegally pushing its own rival services, Teams and OneDrive, in Windows. The EU is evaluating those complaints but hasn’t opened an official investigation.
The Activision deal is likely to bring more complaints. It will bring a slew of Activision video games under the Microsoft banner, including Call of Duty, World of Warcraft, Candy Crush and Tony Hawk’s Pro Skater. The buyout will also consolidate a huge consumer base, merging Activision’s 400 million monthly users with the 25 million subscribers to Microsoft’s Game Pass service.
For its part, Microsoft has some eye-watering forecasts for the growth of the industry, with CEO Satya Nadella saying that by 2030 the company expects 4.5 billion people to be gaming globally, a significant increase from the current estimate of 3 billion.
The planned acquisition comes just a year after the European Commission signed off on Microsoft’s buyout of video-game outfit ZeniMax Media for $7.5 billion. Brussels concluded that no threats to competition emerged as a result of the takeover “given the combined entity’s limited market position upstream and the presence of strong downstream competitors in the distribution of video games.”
There are signals that the companies and the market expect the Activision deal to face lengthy regulatory reviews. Microsoft and Activision said that the transaction will be closed by the middle of next year, up to 18 months after the announcement. Moreover, Activision shares are still well below the $95-a-share offer price.
“What this tells us is that the deal is not straightforward and that the road to its approval could be bumpy,” said a Brussels-based competition lawyer. “The market and the parties are factoring in an in-depth investigation, which is indeed on the cards.”
Experts believe the deal is likely to eventually be approved, however, perhaps with some concessions.
The competition issue most likely to arise is input foreclosure, which means that Microsoft could make games exclusive to the Xbox or its games store, said Friso Bostoen, a competition law expert at Leuven University. He added that there is a precedent: After the ZeniMax acquisition, Microsoft made the upcoming “Starfield” game exclusive for Xbox users.
An important question here seems whether it has the incentive to do that for games such as Call of Duty, Bostoen said. “Microsoft may lose more from not distributing Activision games to rival consoles than it would win from drawing more players to Xbox,” he said.
“The European Commission might want some commitments from Microsoft on that,” he added, referring to games distribution.
Microsoft said that the games market is “diverse and fragmented” and that even after the deal the company will be the world’s third-largest gaming company, behind Tencent and Sony.
“Mobile game distribution runs through Apple and Google, who can generate more money from consumers who purchase games than the actual studios and developers who make the games,” Microsoft said.
“We have no intention of withdrawing games from existing platforms, and our strategy is player-centric — gamers should be able to play the games they want where they want,” it added. “We believe this acquisition will only increase competition but it is ultimately up to regulators to decide.”
Activision Chief Executive Bobby Kotick told CNBC that “the competition has never been greater and it’s coming from all forms.”
While not yet notified in Brussels, the $68.7 billion deal will meet thresholds for review under the EU merger regulation. Probes are also likely in several other global jurisdictions — including the U.K. and the U.S.
Microsoft’s bid is also on the radar of groups in the consumer rights space. “We are keeping an eye on this deal, but it’s too early for us to comment on it as we need to gather further information first,” said EU consumer group BEUC’s Sébastien Pant.
For Microsoft’s Nadella, the company’s pursuit of the gaming space is indicative of loftier ambitions to become one of the front-runners in the architecture of the next iteration of the internet: the metaverse.
The term metaverse has come to represent expectations for the next iteration of the web — a fully immersive virtual environment where users will be able to interact with one another, work, play games and purchase goods and services. Those pushing this development say that many of our real-world habits will be replicable virtually in the metaverse.
While the web’s next big promise has become almost synonymous with the future ambitions of Meta (formerly Facebook), which has hedged its bets on the metaverse being the future of entertainment and digital trade, this nascent domain has also attracted the interest of Microsoft and other players.
“There won’t be a single, centralized metaverse and there shouldn’t be,” Nadella said last week on the announcement of the Activision deal. “We need to support many metaverse platforms, as well as a robust ecosystem of content, commerce and applications.
“In gaming, we see the metaverse as a collection of communities and individual identities anchored in strong content franchises, accessible on every device,” Nadella said.
But the idea of a brave new world of online existence where our every interaction, gesture and decision is virtualized, has provoked the concern of several high-level political officials in Europe — keen to know about the implications to competition, consumer rights and data protection in this space.
In a recent POLITICO interview, EU digital chief Margrethe Vestager revealed her unease at the breakneck development of the metaverse, and declared that it was an area regulators should take greater heed of. In a similar spirit, France’s Digital Minister Cédric O has said that he wants to put the matter of the metaverse on the table of transatlantic counterparts, in the context of the EU-U.S. Trade and Technology Council.
While it is early days in terms of greater EU scrutiny of Microsoft’s Activision swoop, thoughts of how the U.S tech giant may seek to assimilate a growing gaming empire into its metaverse visions — and the ramifications that this may entail — could very well feature as part of future merger probes. This is particularly the case should the company seek to realign its business objectives and make use of personal data — an asset that increasingly garnering deeper scrutiny in acquisition analyses.
“Microsoft might be tempted to move to an advertising-based model in future, which might involve far more invasive use of personal data,” said Meyers at the Centre for European Reform.
“That could happen either to grow its customer base beyond paying gamers, or to extract revenue from gamers, who are lucrative advertising targets because they are far more likely than the average consumer to spend money online,” Meyers added, noting also that, while the deal could very well pass antitrust scrutiny, it may pave the way for problems down the road.
“So there is a big risk that the deal passes antitrust scrutiny, but makes Microsoft more of a target for regulation in future,” Meyers said.
Simon Van Dorpe contributed reporting.This article is part of POLITICO’s new coverage of Competition and Industrial Policy. This coverage includes the must read Fair Play newsletter every weekday morning.Email [email protected] to request a complimentary trial.