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After months of investigation, on Wednesday the CMA became the first of the three major global regulators to publish its final report on the $69 billion deal.
It said it was preventing the merger of the Xbox and Call of Duty companies over concerns it would “alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for UK gamers over the years to come”.
In its report, the CMA argued the merger would give Microsoft “the incentive to increase the price of Game Pass commensurate with the value enhancement of adding Activision’s valuable content to it”, and that “even a modest price increase would significantly reduce or eliminate any potential relevant customer benefits”.
Microsoft and Activision subsequently confirmed their intention to appeal the CMA’s decision, and all hope is not lost, according to Michael Pachter, the managing director of equity research at Wedbush Securities, and Piers Harding-Rolls, research director of games at Ampere Analysis.
In a research note sent to VGC, Pachter said the CMA had thrown “a wrench into the process, but the deal isn’t dead”. He believes Microsoft can win the case on appeal, but even if it doesn’t, he said the Xbox maker could still make concessions that would help clear the deal.
“While successfully appealing a CMA decision is a difficult task for several reasons, we think the CMA is on the wrong side of the law on this ruling, and believe its concerns can be addressed,” he wrote.
“Ultimately, the ruling hinges on the CMA’s belief that Microsoft will have pricing power due to its market dominance in cloud gaming. We think that the CMA’s belief is correct, and Microsoft erred in not addressing this issue before the CMA’s ruling.
“However, we firmly believe that Microsoft is willing to concede maintaining pricing at $15 per month plus inflation, and we believe the CMA will reverse its position if Microsoft makes that offer.”
In a statement provided to VGC, Harding-Rolls said today’s ruling was “clearly a blow to Microsoft and Activision and their efforts to get the acquisition over the line”, but that the deal could still close this year.
“Historically, a majority of CMA appeals have been unsuccessful but there is still a chance this can be overturned,” he said. “According to the Competition Appeal Tribunal site, straightforward cases are aimed to be dealt with within nine months but often take at least a few months.
“If the appeal is successful it is then returned to the CMA to review which again will take some time. So, we could be looking towards the end of the year if everything goes in favour of Microsoft and Activision to close the deal.”
Should its appeal prove unsuccessful, Pachter said Microsoft could still win the CMA’s approval by agreeing to keep Activision Blizzard titles off its Game Pass subscription service in the UK.
“It can separate Game Pass UK from Game Pass elsewhere, either by creating a separate entity in the UK that can easily be monitored by the CMA or by an appointed third party, or by merely managing the UK business separately,” he wrote. “We expect that this will be sufficient for the CMA to rule the merger acceptable on the condition that Activision titles are not available on Game Pass.
“Microsoft will agree to this condition subject to an appeal: should it prevail, it captures full value from the acquisition; should it fail, it captures most of the value, but its prospects for Game Pass growth in the UK (a low percentage of global GDP) will be limited due to a lower amount of content available on the service.”
In a statement released after the CMA published its report, Activision Blizzard CEO Bobby Kotick said work on an appeal had already begun, and claimed the company was confident in its case “because the facts are on our side: this deal is good for competition”.
So far, the proposed acquisition has been approved in Saudi Arabia, Brazil, Serbia, Chile, Japan and South Africa.
“Next up is the EU decision on the deal towards the end of May and the FTC administrative court action at the beginning of August,” Harding-Rolls noted.
In the US, the Federal Trade Commission is suing Microsoft in a bid to block the Activision Blizzard deal over competition concerns.