The UK will block Microsoft's $US69 billion ($104 billion) acquisition of Activision Blizzard, dealing an enormous blow to the biggest-ever deal in gaming.
The Competition and Markets Authority (CMA) ruled on Wednesday that the merger would not be permitted over concerns it would hold back competition in the gaming industry.
But this isn't about console wars. The CMA's decision is instead based around keeping the innovation playing field open in the emerging world of cloud gaming.
Cloud gaming is the video game industry's answer to streaming sites like Netflix.
Rather than purchasing a physical copy of a game from a shop or downloading a game from an online store, games on the cloud are hosted entirely on remote servers.
Players subscribed to cloud gaming services are presented with a library of games they can play at an instant, with no installation or hard drive space requirements. All that's needed is a steady internet connection.
The CMA said the acquisition of Activision "could make Microsoft even stronger in cloud gaming, stifling competition in this growing market".
"We found that, after the merger, Microsoft would find it commercially beneficial to make Activision's titles exclusive to its own cloud gaming service."
In a proposal to address the concerns flagged by the CMA prior to the decision, Microsoft had attempted to assuage fears over competition domination by offering up Activision's Call of Duty series, among others, to a range of leading cloud gaming platforms, but it was not enough to convince the regulator.
The CMA ruled Microsoft was not "sufficiently open" to releasing games on operating systems outside Microsoft systems and "did not sufficiently cover different cloud gaming service business models, including multi-game subscription services".
"Cloud gaming needs a free, competitive market to drive innovation and choice," chairperson Martin Coleman said.
Representatives from both Microsoft and Activision released statements committing to appeal the UK's decision.
"This is not the news we wanted — but it is far from the final word on this deal," Activision CEO Bobby Kotick said in an email to staff.
"Alongside Microsoft, we can and will contest this decision, and we’ve already begun the work to appeal to the UK Competition Appeals Tribunal," Mr Kotick said.
"We're especially disappointed that after lengthy deliberations, this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works," Brad Smith, vice chair and president of Microsoft said in a statement.
"Global innovators large and small will take note that — despite all its rhetoric — the UK is clearly closed for business," Activision said in a separate statement.
In 2020, Microsoft acquired Bethesda (the company behind Skyrim and Fallout) in a $9 billion deal, and has said its next three major games from the developer would be exclusive to its Xbox and PC platforms.
Gaming industry dominated by big three
There are just three major companies that have dominated the gaming industry for the past 20 years – Microsoft (Xbox and Windows), Sony (PlayStation) and Nintendo (Switch being the latest console).
The three operate with almost total command of traditional gaming, but the CMA suspects the emerging cloud gaming technology could challenge the monopoly.
"The evidence we have seen suggests that cloud gaming may be an important disruptive force in the gaming industry," the CMA report said.
"Since games are executed remotely, gamers can play using devices that can be less powerful, and are often cheaper, than consoles or gaming PCs (such as mobile phones, smart TVs, less powerful PCs, or tablets). This widens the pool of potential customers — including to those not willing or able to buy a gaming console or PC—and introduces new ways to compete that could facilitate new entry."
The CMA said the cloud gaming market was estimated to be worth 11 billion pounds ($20 billion) globally by 2026.
For cloud gaming customers, Microsoft currently offers Xbox Game Pass, a subscription service for Xbox players, and PC Game Pass for PC users.
In its report, the CMA pointed to Microsoft's ownership of an estimated 60-70 per cent of all cloud gaming services, as well as competitive advantages including owning Xbox, PC operating system Windows and cloud software Azure.
"Given its already strong position, even a moderate increment to Microsoft's strength may be expected to substantially reduce competition in this developing market, to the detriment of current and future cloud gaming users," the report said.
Both the EU regulator and the US Federal Trade Commission are yet to rule on the merger.
The European decision is due in May, and a US court will hear the case in August.
