Microsoft-Activision Deal’s Bumpy Regulatory Road: Explained

The European Union’s approval of Microsoft Corp.‘s $69 billion acquisition of Activision Blizzard Inc. highlights the increasingly complex, conflicting web of multinational merger reviews.

The European Commission announced Monday it had greenlit Microsoft’s acquisition of one of the world’s largest video game publishers, responsible for the blockbuster Call of Duty and World of Warcraft franchises. Critics of the deal say it would concentrate the market for cloud gaming and allow the tech giant to degrade quality and access to Activision games on competitors’ consoles, such as Nintendo and Sony.

Given the deal’s international scope, the companies’ path to completing it has been complicated by the need to get clearance from regulators’ worldwide. Microsoft has had mixed success with regulatory reviews in several countries so far.

What conditions did the EU impose?

Microsoft agreed to a free ten-year license for consumers in the European Economic Area, allowing gamers who bought an Activision game to stream it on gaming streaming platforms of their choice, including personal computers and consoles.

Activision doesn’t currently license its games for streaming or cloud services, which means gamers can only play on the platform they chose at the time of their purchase.

Cloud gaming services are a small but growing part of the gaming ecosystem that allows users to play games streamed remotely from another device, sidestepping the technological limitations of their chosen computer or console.

What have other regulators said?

The UK Competition and Markets Authority last month blocked the deal, citing harm to the emerging cloud gaming industry. Microsoft is appealing the decision, but court watchers see the bid as a time-consuming longshot unlikely to pay off.

The US Federal Trade Commission has filed a lawsuit to block the deal in its in-house court over similar alleged harms. The FTC is also concerned the deal could foreclose competition in the market for multi-game content library subscription services.

To close the largest acquisition in the history of the video game industry, the companies need approval from all three regulators, in addition to China and other countries that have yet to make a decision. Several other countries, including Brazil and Japan, have cleared the deal without imposing conditions.

Why are so many regulators involved?

Regulators in each country where a company does significant business are able to scrutinize a deal and potentially move to block it. Their methods differ, however. Agencies in countries like the US have to sue in court to block a deal. EU and UK regulators can unilaterally decide a deal is unlawful, forcing the companies to appeal that decision in court.

Companies pursuing large global deals often have to file for regulatory approval in dozens of countries, all with different timelines and procedures.

The multi-jurisdictional web means merger review takes longer, is more expensive, and in some cases has varying requirements and standards. The threat of those stumbling blocks can affect which deals are proposed in the first place.

The complexity increases when separate approaches are proposed in different jurisdictions. Regulators’ proposed fixes are inherently designed to address issues in their own country, not more broadly, as with the European Commission remedy covering licensing only in the EU. Those fixes can become meaningless if other jurisdictions like the UK or US block a deal.

Will the EU’s approval help Microsoft elsewhere?

Not substantively. It may help Microsoft counterbalance the FTC’s attempts to point to the CMA’s decision as evidence in support of blocking the deal. Microsoft can point to its EU win to argue US and UK concerns are invalid.

But the EU clearance is otherwise unlikely to influence the ultimate outcome beyond the public relations arena. It carries no legal weight in other jurisdictions.

As illustrated by the varying jurisdictions’ responses, different markets have different priorities, so the deal’s impact on the US console, cloud gaming and subscription services markets is likely distinct from elsewhere.

What’s next for the deal?

The merger is still on the ropes, despite Microsoft’s EU win.

The company faces the prospect of long, daunting litigation to overcome the objectons from US and UK regulators. Microsoft is appealing the UK decision to that country’s Competition Appeal Tribunal, but that body often sides with the regulator.

The FTC’s case goes to trial in front of an administrative law judge at the agency Aug. 2. Even if Microsoft wins, the commission can overrule its in-house judge, which would require the companies to appeal the ruling to a federal appeals court.

Read more:

— From Bloomberg Law:

Microsoft-Activision Challenge Tests FTC Emerging Markets Focus

— From Bloomberg News:

Microsoft-Activision Gets Sliver of Hope as EU Defies UK

Microsoft’s Activision Deal Chances Evaporate After UK Blow

US Filed Microsoft-Activision Suit to Head Off EU Settlement