On the 8th of February, the UK’s Competition and Markets Authority announced its initial findings in its investigation of Microsoft’s roughly 70-billion-dollar acquisition of Activision. Their frosty report – full of concerns that the deal could “substantially reduce the competition that Microsoft would otherwise face in the cloud gaming market in the UK” – suggests the wind may now be blowing against the deal.  The CMA are not the only ones concerned though, these findings are the latest in a string of global investigations, which include the Federal Trade Commission’s substantive antitrust case against the merger. 

While the CMA has made its reservations clear, this does not end the possibility of the deal going ahead, with commitments from the Redmond-based firm to allow flagship products like Call of Duty to be playable cross-platform for ten years. This is unlike earlier acquisitions such as ZeniMax Media (and subsidiary Bethesda), which have announced that franchises Fallout and the Elder Scrolls will be X-Box exclusives, available on Game Pass – the streaming service that is at the heart of the dispute. 

Today, Microsoft is not a dominant player in the gaming industry. Sony and Nintendo have their own exclusive offerings for gamers.
But it is not in gaming per se that the most important market power threat of the Activision deal lies. The larger question is about ramifications for the cloud. The CMA’s announcement is welcome: regulators should be paying attention.  

How does a gaming deal threaten the evolution of competition in cloud computing? 

Cloud computing is the single key factor re-shaping the digital economy. 

Firstly, a quick recap. The video game industry is huge, with several large studios based in the UK, over$180 billion (or around £150bn) revenue in 2021 and close to 3 billion players. All the world’s a gaming market, with half the population already playing.

Competition authorities in the UK, EU and US have legitimate concerns that consumers would be worse off if gaming products are increasingly exclusive, where (for example) Activision games could only be played on Microsoft’s XBox or Microsoft’s streaming game services (more on this streaming channel later). Competition between console providers is fierce and consumers benefit if it remains so. 

Brad Smith, President of Microsoft, has himself previouslyexplained it would be irrational for Microsoft to restrict distribution of Activision games. The consoles themselves sell at close to cost. Games make money, not boxes. The more games consumers have access to regardless of platform, the better.

The ten-year pledge of competitor access to Call of Duty, a 30 billion dollar (or around 24 billion pounds) franchise over the last 19 years, seemingly confirms this logic,despite Microsoft’s alleged broken promises to European
antitrust authorities about the ZeniMax deal. So surely the two sides could agree to firm up Microsoft’s assurances in ways that would satisfy the CMA’s immediate concerns about gaming. 

But larger issues are at play.
Competition policy is increasingly thought of as a tool not just to avoid consumer harms, but to actively shape future markets
, per Lina Khan.  We should be talking more about what the deal means at the intersection of
the cloud and the virtual reality sphere, two vital future technology markets that are interconnected and will grow together. 
 

It makes sense to listen to what the Microsoft and Activision CEOs tell investors directly on this topic. Indeed, they strongly emphasise the metaverse-cloud connection. Console vs. game economics, bundling, and hardware-software siloes, or “walled gardens”, are all part of the discussion. More important than any of these is the XBox Game Pass, the Microsoft Azure cloud-based game streaming service. 

Brad Smith has touted the advantages of Game Pass for consumers as a de facto equivalent to Netflix or Amazon Prime. But it is the long-term expansion of the Azure cloud through the siloing of captive demand that lies at the heart of the regulatory dispute.

Streaming games is a guaranteed source of demand for the Microsoft cloud. Most importantly, it will expand the company’s digital world-building capacity — exactly what will make future virtual reality platforms and similar products compelling.
Not just for gaming, but for business applications too.  

It makes a lot of sense from the perspective of a long term investor. The boundary between what we call games and, to use a tech term, “enterprise applications”, is increasingly fuzzy. At the technology layer, both depend on massive data engineering capacity. Gaming and the business world are increasingly utilising cloud-integrated artificial intelligence (AI) as a service. 

ChatGPT or better, premium software will soon be writing scripts for a new scene in a game just as it will write advertising copy. Perhaps not for the next iteration of God of War, but for one of the dime a dozen conventional games available in the XBox and Playstation libraries. The improvements that emerge in one of these settings will inform and drive improvements in the other as well.

Even at the user interface level, games and business are converging. Imagine a virtual meeting room for a business with the detail and interactivity of a top-tier video game, compared to those in present cloud workrooms. Whether it is a game or business product becomes largely irrelevant.

Speculative? Possibly. But it is notable that Microsoft has not offered to make Call of Duty available on Sony’s Playstation Plus streaming service, the Game Pass’s direct competitor, but merely on the console itself.  Conceding access on last decade’s platform is not the same as assuring open access for how games will evolve in this coming decade, and Microsoft has explicitly chosen not to take the latter and more important step. 

Regulators, politicians, and the wider public will continue to argue about whether competition regulators should be in the business of shaping future markets. But these often esoteric philosophical debates have a clear point: they grapple with a real and economy-critical risk.   The Microsoft-Activision tie-up has far wider ramifications for the future of cloud-based computing and enterprise markets, above and beyond the market of games and consoles. The world should pay much greater attention.

Source: https://www.finextra.com/blogposting/23712/the-microsoft-activision-tie-up-is-about-much-more-than-just-call-of-duty?utm_medium=rssfinextra&utm_source=finextrablogs