Microsoft’s Cloud Gaming Dreams Are Falling Apart

Some observers have welcomed the deal, 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 Thul, 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 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 games 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 Webber 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.”