The United Kingdom’s Competition and Markets Authority (CMA) delivered a shocker this week when it blocked Microsoft’s acquisition of Activision Blizzard on Wednesday. While a lot of focus on Microsoft’s fight was centered around whether or not the acquisition would give Xbox consoles an unfair advantage over PlayStation consoles, what ultimately decided it was a much smaller market: cloud gaming.
The idea of being able to stream the game you’re playing from the cloud has existed for well over a decade. Cloud gaming’s relevance to the video game industry has only grown over the past several years thanks to both failed and successful efforts from big tech companies like Google, Amazon, and, most importantly, Microsoft. Still, cloud gaming is considered relatively niche, with Activision Blizzard Bobby Kotick calling it “inconsequential” in an interview with Bloomberg and UCL Associate Profession Joost Rietveld saying it’s not a distinct market in a submission to the CMA.
Despite those pleas, the CMA claims that cloud gaming is a “nascent market” and that “already strong incumbent in this market even stronger” in its 418-page report on the matter. Following the CMA’s decision on Wednesday, I spoke to several different analysts to find more clarity about how big Microsoft is in the cloud gaming space and why the CMA should feel compelled to intervene. While experts mostly side with Microsoft over the CMA on this decision, one greater truth emerged from these discussions. Whether one thinks cloud gaming is relevant to this acquisition or not, this emergent style of gaming has reached a point of no return where it’ll be instrumental to the video game industry going forward.
Cloud gaming may sound like a niche within the industry, but that’s not entirely accurate. BrandFinance Managing Director Laurence Newell tells Digital Trends that “cloud-based services account for over 70% of Microsoft’s brand value, amounting to a staggering $137.5 billion.” That’s quite an eye-catching number that understandably would raise a regulator’s alarm bells. However, Newell admits that gaming only makes up 8.5% of Microsoft’s revenue, and cloud gaming is an even smaller amount of that slice.
Despite its relatively small impact on the wider company, most of the experts I spoke to agreed that Microsoft has emerged as a cloud gaming leader thanks to its compatibility with a large segment of the Xbox Game Pass Ultimate library. Conversely, Activision Blizzard has had almost no cloud gaming presence outside of one Sekiro: Shadows Die Twice port on Google Stadia before that service’s shutdown. If it were to be acquired, it is inevitable that more Activision Blizzard games would likely come to cloud-based gaming services.
Despite the shutdown of Google Stadia and the relatively small brand value received from cloud gaming compared to the rest of the company, the CMA still points out in the press release about its decision that “monthly active users in the U.K. more than tripled from the start of 2021 to the end of 2022. It is forecast to be worth up to 11 billion British pounds globally and 1 billion pounds in the U.K. by 2026.” Associate Professor of Strategy and Entrepreneurship at the UCL School of Management Joost Rietveld, who has also been a consultant for Microsoft during its acquisition process, challenges the notion that cloud gaming as a whole is a single market.
Instead, Rietveld splits it into four categories, placing Xbox Game Pass into a category called “cloud gaming as a feature,” which is when it’s “offered as part of a consumer-facing distribution platform” or “included within a bigger bundle of services provided by the platformer.” Under Rietveld’s view, services like Nvidia GeForce Now, Ubitius, and EE — all of whom Microsoft has made individual deals to bring Activision Blizzard and Xbox Game Studios titles to — fall into different categories and thus shouldn’t be considered or directly compared to Xbox Game Pass. No matter how they’re categorized now, the real question mark looming over the technology is its future growth, according to Omdia Senior Principal Games Analyst Steve Bailey.
“Will it remain a niche additional service or become the gaming platform of the future?” Bailey asks in his statement to Digital Trends. “Our projection is that cloud gaming is growing rapidly (revenue should more than double by 2026), but it’s still a long way from taking over the games market, so it remains arguable either way.”
“Arguable” stands out as the keyword to me here. Like any emergent technology, we’re heavily debating the positives and negatives of cloud gaming, specifically through the lens of this acquisition. But what exactly is it that the CMA sees in Microsoft that worries them?
“The CMA’s argument is not that acquiring Activision Blizzard would allow Microsoft to dominate the console market as a whole, where Sony and Nintendo have strong positions relative to Xbox, but only that it would help it to achieve a dominant position in cloud gaming specifically,” Bailey tells Digital Trends. “Microsoft and Activision Blizzard will likely argue that this is disproportionate, given the relatively small scale of the cloud gaming market.”
Microsoft is the market leader in an admittedly very small market. The CMA is concerned about whether or not having Activision Blizzard franchises like Call of Duty on Microsoft’s own service would be to the detriment of others in a fledgling market that the CMA’s bullish on. Microsoft had tried to ease concerns about this by striking up deals with companies like Nvidia, but it wasn’t enough for the CMA. Rietveld personally points out two shortcomings on Microsoft’s part: it didn’t support competing services like Amazon Luna and PlayStation Plus enough, and the deals offered to cloud gaming companies like Nvidia were “insufficiently compatible with the dynamic nature of the rapidly-developing cloud gaming space.”
The tricky thing about the current state of the cloud gaming space is that there isn’t a clear picture of how vital it will be to the game industry’s future. Is it the future of gaming, or will it only remain a novelty for those that can afford expensive gaming hardware or stable internet connections? Microsoft’s efforts with “cloud gaming as a feature” appear to land somewhere in the middle; its games are potentially available to more people than ever, thanks to cloud gaming, but it’s mainly a bonus for loyal Xbox Game Pass Ultimate subscribers.
[Microsoft] is becoming a victim of its own success.
Something like this Activision Blizzard acquisition would only strengthen that proposition. In a statement provided to Digital Trends that you can also read on MIDiA’s blog, Senior Games Analyst Karol Severin says that this approach also puts Microsoft’s cloud gaming efforts in a catch-22 situation.
“If you are one of the few early movers in a small market, your market share is naturally going to be high in relative terms,” Severin explains. “Microsoft may naturally feel that it is being punished for innovation which aims to make gaming better and more accessible to consumers (and to be clear, yes, make more money in the long-term). In a way, it is becoming a victim of its own success.”
With this acquisition, Microsoft is betting big on the power of Call of Duty. It’s one of the most popular franchises in the whole industry, so having it on one’s service is an obvious draw that would bring more people to Xbox Game Pass Ultimate and, in turn, cloud gaming. The CMA, meanwhile, like to see companies like Activision Blizzard pursue cloud gaming efforts independently or at least not due to direct ownership by a platform holder. Severin points out that this reasoning causes a sort of cloud gaming paradox.
“CMA suggests that a part of this decision is to protect companies which may have cloud streaming plans on their own, including Activision,” Severin explains. “The paradox is that Activision had obviously agreed to the acquisition offer in the first place — in other words, Activision decided that it would rather sell the company than pursue cloud gaming alone. If the games company with the most popular game franchise on earth made this decision, is the CMA expecting heaps of other smaller games companies to have a realistic stab at cloud gaming?”
In the CMA’s eyes, the answer to the last question is yes. But to everyone I spoke to, it’s debatable. Just look at film and TV streaming, and the constraints we’re starting to see as almost every studio has its own service. Having great games is vital to the success of a cloud gaming service, and titles like Call of Duty are some of the most popular gaming content one could get for it.
The debate came down to whether or not a company with an already strong foothold in cloud gaming like Microsoft should also be able to acquire content like that, and in the CMA’s eyes, the answer was no. You may disagree with the answer, but cloud gaming is now at the point where that is definitely a question that needs to be asked when major industry players make big moves.
So, what happens next? Both Microsoft and Activision Blizzard have made it clear that they are appealing the decision and may reconsider their businesses’ presence in the U.K. They also have to account for the financial impacts this deal’s failure could have on their businesses. Newell indicates that while Microsoft’s losses are “difficult to quantify,” this may only be the start of troubles for Activision Blizzard. After the news dropped Wednesday, Activision lost 13% of its market cap.
“We believe that due to the large difference in the size of the two players (Microsoft and Activision), the biggest impact would be on Activision,” Newell said. “This is evidenced by the sudden 13% drop in Activision’s market cap when the news broke of the blocked merger. Furthermore, we estimate that Activision will lose approximately $800 million in brand value, equivalent to an 11% loss, as a result of the change in revenue forecasts.”
The CMA’s decision appears driven by a conviction to protect a nascent market … but I fear the opposite might happen.
Looking at those numbers and the poor optics generally, if this deal fails, it’s no surprise that Microsoft and Activision Blizzard will still try very hard to push this deal through. Even if it doesn’t, though, Activision Blizzard will likely be able to take the hit and continue to churn out annual Call of Duty games and updates for Warzone 2.0, Overwatch 2, and World of Warcraft. Meanwhile, Xbox also has plenty of first-party titles in development for Xbox platforms. It’s more important to consider what this means for cloud gaming.
“The CMA’s decision appears driven by a conviction to protect a nascent market and to allow it to grow and innovate, but I fear the opposite might happen,” Rietveld tells Digital Trends. “Microsoft has offered licensing deals to several cloud gaming services … This alone could propel the cloud gaming space, and it would also trigger Sony to do more in terms of its cloud gaming offering to remain competitive. Cloud gaming is still only a fraction of the larger games industry, and I believe that this acquisition could actually give the space a much-needed jolt.”
The fact that we even have to think about that shows how far cloud gaming has come and how it’s likely here to stay as an ever-growing part of the industry, whether Microsoft owns Activision Blizzard or not (regardless of any gripes some players have for the tech). This whole ordeal with Microsoft’s Activision Blizzard acquisition is our first indication that cloud gaming is not something that we can ignore or downplay as an industry anymore.
Even if they are downplaying it to get this deal through, cloud gaming is something Microsoft is heavily pursuing, and it’s part of the industry that is projected to continue to grow. If Microsoft successfully appeals the CMA’s decision, some of the industry’s biggest games could draw more people to cloud gaming. If it never happens, cloud gaming will always be remembered as the reason the biggest video game industry acquisition never went through.
Cloud gaming is a concern to regulators with a broader view of the industry than your typical gamer. As cloud gaming is having a noticeable impact on company values, acquisitions, industry regulation, and the arguments and concerns spawning from all of that, it’s clear that the technology is finally reaching a level where it should be notable to anyone who cares about video games.
Cloud gaming might not have seemed important to you before the CMA’s acquisition, but it’s too important to ignore after.
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