Microsoft’s stunning courtroom victory over US regulators trying to block its acquisition of video game maker Activision Blizzard has just revived the prospects of a $75bn deal that many on Wall Street had thought, only weeks ago, was on its last legs.
Tuesday’s ruling marked a dramatic about-turn in the software company’s first clash with US antitrust authorities since they sought to break the company up at the end of the 1990s. And by prompting a concession from UK regulators, it also appeared to weaken the most strident opposition to a deal that could reshape a global video gaming industry whose revenues PwC expects to reach $227bn this year.
A judge in a federal court in San Francisco refused a request from the Federal Trade Commission for an injunction preventing the deal from closing.
Within less than an hour, the UK’s Competition and Markets Authority, the only agency around the world to have issued a formal block on the deal, appeared to backtrack, saying it had agreed with the companies to put the legal battle over its decision on hold. It asked Microsoft and Activision to come up with new concessions to satisfy its concerns, having rejected what they offered in April and suggested it was against any such remedies.
The dramatic reversal could cause an earthquake in the games industry and possibly beyond, if the setback for the FTC leads the regulator to rethink its recent interventionist stance, according to several analysts and investors. By signalling that similar gaming deals are less likely to face intervention, “this is huge for the games industry”, said Josh Chapman, a US venture capital investor whose firm, Konvoy, backs gaming start-ups and stands to benefit from more dealmaking.
Shares in Electronic Arts and Take-Two Interactive each rose by about 5 per cent on Tuesday.
Games industry experts also predicted that if the deal is completed, it will set the stage for a concerted attempt by Microsoft to forge a new business in “cloud gaming”, or streaming games over the internet, with potentially as big an impact as Netflix had in the television and movie business.
Microsoft chief executive Satya Nadella and Activision CEO Bobby Kotick had made clear during a five-day hearing in San Francisco that they had little interest in doubling down on the console market, where Microsoft ranks third behind Sony and Nintendo. Instead, their eyes are set on the much bigger mobile gaming business — where the app stores run by Apple and Google hold sway — as well as the nascent market for streaming games over the internet.
A 10 per cent jump in Activision’s share price on Tuesday, to $90.99, put it within 5 per cent of Microsoft’s all-cash offer, suggesting that most investors believe the deal is now all but certain to be completed.
However, comments by the US and British regulators have left an open question about whether they will still press the companies for important concessions.
The FTC has until Friday to file an appeal and has yet to comment on how the ruling may affect the challenge it first mounted in its in-house court, whose proceedings are set to begin on August 2.
The regulator has previously withdrawn challenges after facing similar defeats in federal courts, but on Tuesday said it would “continue our fight to preserve competition and protect consumers”.
The call by the UK’s CMA, meanwhile, appeared to be a “fig leaf” to preserve the impression that it could still force meaningful concessions, said Chapman. Brussels has already squeezed a significant concession from Microsoft, which agreed to license any cloud games to rival platforms for 10 years. With the setback in the US leaving the CMA as potentially the only agency opposing the deal, British regulators would now have a strong incentive to accept something similar, he said.
However, things may not be so straightforward. Microsoft had already offered the CMA the same terms accepted by Brussels, suggesting that it would have to come up with something more to get the regulator’s backing, said Joost Rietveld, a former games industry executive and now an academic at University College London.
This could involve promising to licence more of its games to other streaming services or negotiating licences with different types of cloud competitor, he added. That could pose a challenge, according to Rietveld, since one of the only full-service streaming rivals is Amazon’s Luna, potentially forcing Microsoft to try to reach a deal with one of its biggest tech industry competitors.
Without clear new concessions from the companies, some investors warned the CMA could still try to force Microsoft to divest part of Activision’s business. “In our world, this a big and unprecedented development,” one big hedge fund investor said, suggesting the regulators would still push for important concessions. Yet Microsoft has set its face against shedding any of Activision’s business.
“The synergy [of the deal] is the breadth and depth of the Activision portfolio. [Microsoft] won’t be looking to divest,” said Rietveld.
Another complicating factor has been the companies’ race to close their transaction before July 18, the deadline they set 18 months ago. Activision has said it strongly backs the original deal and Kotick said on Tuesday that his company was ready “to work with UK regulators . . . so our merger can quickly close”.
However, deal experts pointed out that if the acquisition does not close by next Tuesday, the game maker’s board would be in a position to demand some sort of financial sweetener to extend it while regulatory approval is completed, potentially complicating the process.
The strong signal from the stock market on Tuesday suggests that investors believe the original deal is all but done. In the gaming industry, meanwhile, the FTC’s failure brought predictions for a new era.
“This is a lot like streaming television and streaming movies,” said Sarah Hindlian-Bowler, head of technology research at Macquarie. “First there’s the arrival of a Netflix, and everyone panics. Then whole new ecosystems emerge” as big rivals come up with their own streaming services.
The slow progress in cloud gaming to date, which has included Google’s decision to shut its ambitious Stadia cloud gaming service earlier this year, has left serious questions over whether or when consumers will take to streaming. But if Microsoft follows through with its promise, the rest of the gaming industry may soon be forced to take a whole new way of doing business seriously.