Microsoft announced their intention to acquire Activision Blizzard early in 2022 for the low, low price of $68.7billion, or £50.5billion. Activision’s valuation alone would have made the acquisition one of the biggest deals in the industry’s history, but the lawsuits and investigations it spawned made it the subject of headlines in gaming and business publications for quite some time. Microsft is known for purchasing some of the biggest names in the gaming market: Minecraft, Halo, Obsidian Entertainment, Bethesda owner ZeniMax, Playground Games, and so on. Activision, whose merger was completed as of October this year, is Microsoft’s largest purchase so far.
The merger came under immediate fire by regulators in several different countries due to the immense power Microsoft holds over the gaming market. Microsoft has its own gaming console, the immensely popular X-box, which competes with other industry giants such as Sony and Nintendo. This prompted fears in the market that Microsoft could make popular Activision titles such as the Call of Duty Franchise, World of Warcraft, Overwatch, and beloved classics like Crash Bandicoot exclusive to their own console series.
Another concern included the potential impact on the still-growing cloud gaming market, which Microsoft is now even more favourably positioned to acquire. Several countries taking an interest in the manner in which the acquisition would impact fair competition in the market puts Microsoft in a delicate position – despite both the companies being situated in the US, they could well be prohibited from conducting their business overseas.
Microsoft wins approval for merger
As of now, the merger has been approved in several countries – the UK, the European Union, New Zealand, Chile, Japan, South Korea, Serbia, China, South Africa, Brazil, and Saudi Arabia. The deal was blocked by the FTC in December last year with a lawsuit that alleged that Microsoft would harm competition in the console and subscription services market. The agency went on to provide examples of instances where Microsoft had acted in this manner, most notably when Microsoft suppressed competition from rival consoles in its acquisition of ZeniMax. Activision is one of the few developers who publish high-quality games that can be played on multiple platforms, making gameplay more enjoyable for consumers who benefit from the increased number of options. At the time, Director of the FTC’s Bureau of Competition Holly Vedova commented in a media release that “Microsoft has already shown that it can and will withhold content from its gaming rivals”.
The FTC’s restraining order preventing the two companies from proceeding with the merger was only dismissed by the District Court in the Northern District of California in July this year. After five days of testimony, the court found that the FTC had failed to provide evidence that the merger would substantially lessen competition in the market. Even the FTC’s subsequent appeal was dismissed. The Competition and Markets Authority of the UK (CMA) also took legal steps to prevent Microsoft from going ahead with the deal in a surprise move in April this year. This was due to the effect the merger would have on the cloud gaming market.
A restructured deal
Microsoft has worked around this by including an agreement to transfer the streaming rights for Activision’s games to Ubisoft, another major developer in the market, for 15 years. This would allow Ubisoft to stream all current and new console games made by Activision for the next 15 years on cloud services that don’t run on Windows, in perpetuity. As a result of this change, Microsoft cannot release any Activision game as an exclusive title for Xbox Cloud Gaming. It also cannot control Activision’s licensing terms for rival services. The CMA approved this restructured version of the deal, giving its formal approval on the 13th of this month. The restructure is also an opportunity for Ubisoft to capitalise on cloud gaming services through the licensing and the pricing of the titles. Microsoft is compensated for getting the short end of the stick through a one-off compensation payment by Ubisoft, as well as through a wholesale pricing mechanism that benefits them.
Despite Microsoft’s arguments to the contrary, the merger unquestionably secured the company’s position as the leader in the cloud gaming market. Owning Activision’s titles, and coupling them with the Bbox’s Game Pass, makes the console more and more attractive for consumers while stifling other players from doing the same. The merger is also extremely attractive to Activision itself, which is currently having legal light being shed on a number of unsavoury practices within the company. Some of these lawsuits allege sexual harassment, gender discrimination, and even sexual battery. The company faced internet-wide ridicule for fostering a ‘frat boy culture’, with company executives committing sexual misconduct in the presence of HR. CEO Robert Kotick saw 700 incidents being reported in the company during his tenure, all of which he elected to ignore. The loss of Activision’s reputation would also likely have helped Microsoft negotiate a more competitive price for the merger itself.
How the acquisition will affect esports
As of late last year, Activision’s most popular leagues, the Call of Duty League and the Overwatch League were running into serious trouble in terms of retaining their franchises. In July this year, Activision provided Overwatch League teams with the opportunity to vote on the future of the League, with a promised exit fee of $6 million should they want to quit. The results of the vote – or even if the vote has already happened – have not been made public yet. If all 19 teams in the League do choose to withdraw, however, it would mean a liability of $114 million to a League already struggling with profitability. Team owners had bought into the franchise with payouts of $20 million per slot as recently as in 2018, with latecomers paying even more for the slot. What Microsoft wants to do remains to be seen and most believe that the tech giant will not allow the League to affect their own financials. It is highly likely that the corporation will just discontinue the Leagues altogether. As low as the viewership is for the Leagues, dedicated fans will no doubt find this decision a painful one to bear, as will the teams and the streamers who made it their livelihood.
(Theruni Liyanage)