The UK antitrust regulator has blocked Microsoft’s purchase of Activision Blizzard, threatening to thwart one of the tech industry’s biggest deals over concerns it will stifle competition in cloud gaming.
The Competition and Markets Authority said in a statement Wednesday that it was worried the deal would lead to “reduced innovation and less choice for UK gamers over the years to come.”
The acquisition, which was worth $69 billion when it was announced early last year, would make Microsoft
(MSFT) “even stronger” in cloud gaming, a market in which it already holds a 60%-70% share globally, the regulator added.
Activision’s share price plunged more than 11% on Wednesday, while Microsoft’s stock gained 8%.
(ATVI) is one of the world’s biggest video game developers, producing games such as “Call of Duty,” “World of Warcraft,” “Diablo” and “Overwatch.” Microsoft, which sells the Xbox gaming console, offers a video game subscription service called Xbox Game Pass, as well as a cloud-based video game streaming service.
The deal to combine the businesses has been met with growing opposition by antitrust regulators worldwide. In December, the US Federal Trade Commission sued to block the takeover over similar competition concerns. A hearing is scheduled for August. The European Union is also evaluating the transaction.
The regulators “cooperate quite closely,” said Alex Haffner, a partner at London law firm Fladgate, who described the UK decision as “seismic,” even though it applies only to the firms’ activities in Britain.
“It has potential implications for those [other regulatory] decisions as well,” he added. “It’s hard to see how the deal would carry on without approval from all three regulators.”
In its ruling, the Competition and Markets Authority said Microsoft could seek to make Activision’s games exclusive to its own platforms and then increase the cost of a Game Pass subscription.
“The cloud allows UK gamers to avoid buying expensive gaming consoles and PCs and gives them much more flexibility and choice as to how they play. Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities,” it added.
“The evidence available… indicates that, absent the merger, Activision would start providing games via cloud platforms in the foreseeable future.”
Both companies plan to appeal the decision. “Alongside Microsoft, we can and will contest this decision, and we’ve already begun the work to appeal to the UK Competition Appeals Tribunal,” Activision Blizzard CEO Bobby Kotick said in a statement.
Microsoft President Brad Smith added: “This decision appears to reflect a flawed understanding of the market and the way the relevant cloud technology actually works.”
Their chances of success at the tribunal may be slim, however. “It’s hard to win these appeals because you have to show it was an irrational decision,” said Haffner, the competition lawyer. “The bar is set quite high for success,” he told CNN.
The Enterprise Act 2002 gives the UK Competition and Markets Authority wide-ranging powers to block deals it deems to be harmful to competition.
It has used this authority in the past to block 21st Century Fox’s takeover of Sky News, and the sale of Asda supermarkets to rival Sainsbury’s.
The regulator, which launched an in-depth review of the blockbuster gaming deal in September, said Microsoft’s proposed remedies to its concerns had “significant shortcomings.”
“Their proposals… would have replaced competition with ineffective regulation in a new and dynamic market,” explained Martin Coleman, chair of the independent panel of experts conducting the investigation.
“Microsoft already enjoys a powerful position and head start over other competitors in cloud gaming, and this deal would strengthen that advantage, giving it the ability to undermine new and innovative competitors,” Coleman continued. “Cloud gaming needs a free, competitive market to drive innovation and choice.”
The UK cloud gaming market is expected to be worth up to £1 billion ($1.2 billion) by 2026, around 9% of the global market, according to the Competition and Markets Authority.
-— Josh du Lac and Brian Fung contributed reporting.