Microsoft’s Cloud Gaming Dreams Are Falling Apart

drone in video game screenshot

Courtesy of Activision

Microsoft’s Cloud Gaming Dreams Are Falling Apart

UK antitrust authorities have blocked its $69 billion deal to acquire Call of Duty publisher Activision Blizzard.

In the window of Microsoft’s London flagship store on Oxford Circus, there’s a bigger-than-lifesize all-terrain vehicle—a souvenir of the company’s 2000 takeover of Bungie, creator of Halo. In 2021, the company paid $7.5 billion for ZeniMax, owner of game publisher Bethesda, and creator of The Elder Scrolls. A year after that deal closed, Microsoft launched an even more ambitious play—a $69 billion bid for Activision Blizzard, owner of some of the game industry’s most valuable intellectual property, including Call of Duty and World of Warcraft.

It was the biggest cash deal in tech, and it wasn’t just about buying titles that would help move Xboxes. On one level, it was a way to underpin Microsoft’s move beyond the console, to become a “Netflix for games” that meant customers were no longer tethered to a single device, but bought into a gaming ecosystem on the cloud. But it was more than that. Satya Nadella, Microsoft CEO, said he expected the acquisition to play a “key role” in the company’s metaverse platforms—its forays into virtual worlds beyond just gaming.

“The technology that allows you to play Activision Blizzard [games] is the same technology that allows a process engineer to walk through a virtual oil refinery, turn pipes, move different levers, and see what happens,” says Steven Weber, a professor at UC Berkeley's School of Information. “So to be good at gaming is to be good at the metaverse.”

Today, a regulator in London blocked the deal. The Competition and Markets Authority (CMA), a government department that oversees competition, announced that it wouldn’t allow the merger, because it would make Microsoft too dominant in the cloud gaming marketplace and “would alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for UK gamers.” The ruling doesn’t necessarily mean the deal will collapse, but it is a blow for the company’s ambitions in cloud gaming and beyond. Microsoft and Activision have both said they plan to appeal.

The CMA’s ruling is unusual in antitrust, because its judgment was based on what the merger would mean for an industry that’s still only at a nascent stage. Data from research company Omdia puts sales of cloud-enabled services at $5.1 billion in 2022, compared to nearly $35 billion in conventional console game sales. The regulator, though, argues that cloud gaming is growing fast, that Microsoft’s scale and power would give it a huge head start, and that it would have a strong commercial incentive to make all Activision titles exclusive to its platforms—stifling competition.

In the run-up to the decision, Microsoft had been attempting to demonstrate that its takeover of Activision wouldn’t mean that blockbuster titles like Call of Duty would end up only being available on its hardware, signing deals with other, smaller, cloud gaming companies. The company has previously agreed to make Call of Duty available to its biggest competitors, Sony and Nintendo—though Sony has questioned whether it can trust those promises.

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Some observers have welcomed the ruling, arguing that regulators have allowed tech companies to amass too much power by scaling through acquisitions. “We feel that there has been over a decade of under-enforcement,” says Max von Thun, Europe director at think tank Open Markets, referring to past decisions to let Facebook merge with WhatsApp and Instagram. “Our concern would be that by having the Activision catalog, Microsoft would get an unchallengeable advantage in this market over other cloud gaming services.”

Others, including—unsurprisingly—Microsoft, have challenged the ruling, saying that the CMA has misunderstood how the cloud gaming industry is structured. “The CMA’s decision rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom,” Microsoft vice chair and president Brad Smith said in a statement. Smith said the CMA’s decision was based on a “flawed understanding of this market and the way the relevant cloud technology actually works.”

Joost Rietveld, a professor at University College London who studies technology platforms, argues that cloud gaming is not a distinct market. “You have very different companies that use cloud gaming in very different ways and that are targeted at really diverse customers,” he says. “They’re lumping together all these offerings, and it's unclear that they're actively competing against each other and whether there is this unified harm to consumers if this deal were to go through.”

The merger has already been approved by competition authorities in Japan, Brazil and South Africa. The European Union is still deliberating on the deal, while the US Federal Trade Commission filed a lawsuit seeking to block the merger last August. Evidentiary hearings in that case are scheduled to begin in August this year. Some in the tech sector see the UK regulator’s move as something of a power play.

The CMA’s decision comes days after the UK government announced that it would be giving the agency new powers to fine companies up to 10 percent of their global revenues if they breach local competition rules, and created a new “Digital Markets Unit” that is supposed to protect consumers and improve competition within the UK’s tech sector. That’s caused some alarm in the industry. “The CMA has been increasingly prominent as a competition enforcer worldwide over the last few years, especially following Brexit,” says Richard Pepper, a partner at the law firm Macfarlanes. “They have increasingly been seen as aggressive in merger control. But this is really the biggest deal that they have blocked.”

The decision doesn’t spell the end of Microsoft’s move into cloud gaming, but it is likely to slow it down. In recent years, bigger game companies have often pursued growth through acquisition, according to Daniel James Joseph, a senior lecturer at Manchester Metropolitan University specializing in the games industry. “All the data, pretty much every year, signals the dynamic that the merger represents: The big get bigger,” he says. “Acquisitions are the name of the game for industry growth these days, rather than, say, innovation.”

The company can still grow, but not so easily. “For Microsoft’s ambitions in cloud gaming, even if this setback proved fatal to the Activision deal, there are many other ways to expand in that market, for instance through the acquisition of smaller games publishers,” says Alex Connock, senior fellow in management practice at the University of Oxford’s Saïd Business School.

But scaling slowly may not be what Microsoft wants to do. Its move into cloud gaming wasn’t just about building its entertainment business. Cloud infrastructure is a scale business—companies need to get big and keep getting bigger. Having your own services on the cloud—including data-intensive ones like gaming—is a big deal.

Microsoft is already a cloud computing giant, through its cloud computing business Microsoft Azure. In cloud infrastructure services, Microsoft and Amazon have a combined market share of between 60 and 70 percent, according to an April report by the UK communications regulator. UC Berkeley's Weber says pushing into cloud gaming could cement Microsoft’s position in the market, by feeding demand for cloud services. “The greater the demand, the better the business,” he says.“Cloud gaming is already and will become a much bigger source of demand for cloud infrastructure.”

Updated 4-26-2023, 4.15 pm EDT: This article was updated to correct the spelling of Steven Weber and Max von Thun's names.

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Morgan Meaker is a senior writer at WIRED covering European business. Before that, she was a technology reporter at The Telegraph and also worked for Dutch magazine De Correspondent. In 2019 she won Technology Journalist of the Year at the Words by Women Awards. She was born in Scotland, lives… Read more
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Chris Stokel-Walker is a freelance journalist and WIRED contributor. He is the author of YouTubers: How YouTube Shook up TVand Created a New Generation of Stars, and TikTok Boom: China’s Dynamite App and the Superpower Race for Social Media. His work has also appeared in TheNew York Times,… Read more
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