This article was originally published here for The Student Lawyer. All views expressed are solely my own.
The UK plans on being a ‘global science and technology superpower by 2030.’ Rishi Sunak said he wanted Britain to become “the next Silicon Valley.” It goes without saying that much investment is needed for these goals to become reality – from both the government and the private sector. When the UK Competitions and Markets Authority (CMA) in the UK last week prevented Microsoft from taking over Activision, it led some key players in the market to question whether the UK truly was committed to its goal. This article will look at some of the implications of the Microsoft-Activision deal for the UK technology sector.
What is the Microsoft-Activision deal and why was it blocked?
Microsoft agreed to buy Activision for $69 billion. Activision is one of the largest publishers of video games in the world. According to the CMA, Microsoft, owning Xbox, Windows, Azure and Xbox Cloud Gaming accounts for 60-70% of cloud gaming services. Due to concerns about Microsoft strengthening its dominant position in the cloud-gaming market, and the impact of this on competition and consumers, the CMA decided to block this deal. Notably, the CMA was not concerned that the deal would diminish competition in the console gaming market in the UK.
In its reasoning, the CMA also noted that the deal would enable Microsoft to control games like Call of Duty, Overwatch and World of Warcraft. Although Microsoft was in consultation with the CMA on how to address their initial concerns about it, the solutions proposed by the technology giant did not go far enough. The CMA contended that the proposals by Microsoft would require the CMA to continue to regulate the market- whereas it would be preferable to block the deal and enable the market forces to control the market. More details of the CMA’s reasoning can be found here.
On the other hand, executives of both Microsoft and Activision have publicly decried the decision and questioned CMA’s understanding of the market. Activision’s CEO said that “the UK is clearly closed for business” and is reconsidering its plans to grow in the UK. Bob Smith, president of Microsoft, called this decision ‘bad for Britain’ and suggested in an interview with the BBC that Europe seems like a better place to do business. He also suggested that the regulator did not properly understand how the business operates – confusing consoles with the cloud gaming market. A recent New York Times article explained that the harms which the CMA sought to prevent by blocking this deal were mostly relevant to console gaming. However, in blocking the deal, the CMA emphasised that the main issue was the risk that Microsoft’s expansion posed to gaming in the cloud gaming sector. The latter is different from the former as cloud gaming can be done using just a laptop whereas console gaming requires a controller and console.
Both Microsoft and Activision have said they will challenge the decision in the Competition Appeal Tribunal. However, their chances of reversing the decision are slim, owing to the review being of the procedure the CMA used to come to their decision, not the substance. Should the CMA decision stand, Microsoft may have to pay $3 billion to Activision for the deal falling through.
Is there a trend in CMA decisions?
Last year, Meta’s acquisition of Giphy was reversed by the CMA. In seeking to protect consumer choice, the CMA ordered Meta to sell Giphy which it had acquired in 2020. The CMA made this decision because the takeover would diminish competition in the UK display advertising market, in which Facebook, a subsidiary of Meta, has half a share. Another reason for the CMA decision was that Meta’s acquisition of Giphy could prevent its rivals – Snapchat, TikTok and Twitter from getting GIFS, as these are currently supplied to them by Giphy. This was reportedly the first time the CMA had blocked a deal with one of the largest Silicon Valley companies.
These two decisions were historic for the CMA in their own right. They were both instances where large technology companies had been prevented from expanding by regulators. Presumably not made in bad faith, these decisions appease concerns by some players that companies in the technology sector were growing too large and posing a threat to competition in the market.
What are the wider implications of this deal?
Some have commended the CMA for making this decision. One being the former chair of the Federal Trade Commission (the US equivalent of the CMA) and a previous non-executive director at the CMA, William E. Kovacic, who highlighted that the CMA has the best expertise in the field. He commented that “this is a very big win for the broader effort to realign antitrust enforcement.” In the beginning of May 2023, the CMA launched a review of the AI market. This will include a review of the underlying technology of artificial intelligence, and how this will affect consumers and businesses. Following this, it will produce guiding principles to safeguard competition and consumers. The CMA is taking active steps to ensure that there is fair competition in the fast-evolving technology markets.
Both Microsoft’s president and Activision’s chief executive said that this decision calls into question the UK’s stance and aim of being an attractive destination for investment into technology. Having these sizeable companies reconsider their expansion plans in the UK means that there could be less investment from them in the UK technology market. In a Financial Times article, multiple UK technology companies also expressed concerns about the CMA decision. In the article, Ophelia Brown, founder of VC firm Blossom Capital said that it was not good for the UK’s image. Bob Smith also said that this decision showed that the CMA did not properly understand how the market operates. This is surprising given the wealth of expertise available to the CMA. Perhaps this suggests there ought to be improvements in the consultation process between companies and the CMA.
Smith contended that he was not happy with the process by which the CMA came to this decision. Microsoft had submitted a proposal in response to the CMA’s concerns before the announcement and was surprised by the decision, under the impression that they had met all the requirements. Microsoft’s proposals included licensing agreements with companies such as Nintendo to appease concerns about making Activision games exclusive to Microsoft. Furthermore, the CMA last month ‘retreated from a key concern’, signalling that the deal would be concluded.
Coincidentally, fewer companies, including technology companies, are being listed on the UK stock market. However, data from London & Partners on FDI Markets show that London last year got the second highest level of technology foreign direct investment and received the most tech investment projects in Europe.
Conclusion
Recent decisions of the CMA indicate that the UK is wary of the impact that large technology companies can have on competition in the market. This is meant to benefit consumers and competition – so therefore other smaller technology companies. Granted, prima facie there were flaws in the CMA’s reasoning. However, the decision shows that the UK is not closed for business but is cautious about how this fast-growing sector develops. Contrary to being a deterrent for investment, it should be an encouragement to those seeking to invest in technology in the United Kingdom as it demonstrates that steps are being taken to ensure fairness and create a conducive environment for all technology companies to thrive.
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