Part II: Antitrust contests in the gaming industry

November 2, 2023
11 minutes

Since our last post in this series in March 2023, antitrust reviews in the gaming industry have continued, with merger control investigations in Europe and the UK, as well as competition appeals and market investigations in the UK. 

This article discusses the key antitrust developments in the gaming sector and updates on (i) the regulatory aspects of Microsoft’s acquisition of Activision Blizzard, (ii) Valve’s appeal of the European Commission’s €1.6 million fine in relation to geo-blocking video games on its Steam platform, and (iii) the CMA’s recent market investigation into the distribution of cloud gaming services. 

The European Commission’s game view

On May 15, 2023, the Commission cleared Microsoft’s proposed acquisition of Activision Blizzard (the Transaction), conditional upon Microsoft committing to:

  • Consumer Licence: grant consumers who licence Activision games the right to stream games for ten years from closing of the Transaction by amending their end-user license agreements.  
  • Streaming Provider Licence: grant streaming services a royalty-free licence to stream Activision games for ten years from closing of the Transaction, regardless of whether Microsoft currently streams or will in the future stream these games on its own cloud game streaming service, Xbox Cloud Gaming. Microsoft also committed to granting a royalty-free, worldwide license to stream Activision’s games to NVIDIA, Booseroid and Ubitus.  The updates to the licensing terms are set out in the Commission’s decision and will be published on Microsoft’s website. 

The Commission’s decision provides a useful framework for future transactions in the gaming sector:

  • It defines relevant product and geographic markets, including for the development and publishing of PC and console games, which the Commission considers can be segmented by (i) PC and console; (ii) game genres.; and (iii) game types.  And for the distribution of PC and console games, which can be segmented by PC and console, but does not warrant the distinction by payment model or type of access.  The Commission found that both markets were at least EEA-wide, if not worldwide.
  • It identifies relevant conglomerate relationships between the gaming companies.  For example, links between Microsoft’s Windows PC OS (where Microsoft has a worldwide market share of approximately 70-80%) and Activision’s development and publishing of video games may risk foreclosing rival PC OS providers by tying Activision’s games and Microsoft’s distribution of games via cloud game streaming services to Windows.  The Commission found that such tying would have a “significant impact” on the market, as users would prefer Windows, making it more challenging for rival PC OS to compete.
  • It assesses vertical links between Activision’s upstream game development and publishing activities, and Microsoft’s downstream game distribution activities, and concludes that Microsoft would have the ability and incentive to foreclose rival distributors of console or PC video games which offer cloud game streaming services by restricting access to Activision’s PC and console games.  The Commission found that Microsoft’s cloud game streaming service Game Pass Ultimate had a first-mover advantage, but faces increasing competition from rival cloud game streaming services.  It would thus be incentivised not to licence Activision’s popular games like Call of Duty and World of Warcraft to cloud game streaming services post-Transaction, but instead make Game Pass Ultimate the only cloud game streaming service for Activision’s games. This would increase Microsoft’s revenues, leaving rival cloud game streaming services with insufficient counterstrategies. 

It found that there is sufficient competition in the downstream market for developers and publishers of console games, as Microsoft’s Xbox, Sony’s PlayStation and Nintendo all compete for supply and input of console games.  Responses to the Commission’s market study confirmed that should Microsoft cease to distribute third-party games via its Xbox console, developers and publishers of console games would be able to find alternative distribution channels.  Microsoft would also lack the incentive to foreclose developers and publishers of console games on the Xbox console, as it would need to offer third-party games to ensure its game store remains attractive for gamers. 

UK divergence in play

Shortly before the European Commission conditionally cleared the Transaction, the CMA prohibited the deal on April 26, 2023.  Like the Commission, the CMA reasoned that post-Transaction, Microsoft could foreclose rival cloud gaming services from current and/or future Activision gaming content (such as Call of Duty, World of Warcraft, and Overwatch) and, as a result, harm their ability to compete.  The CMA found that Microsoft was one of the strongest incumbents in cloud gaming services based on market shares and its multi-product ecosystem and would have strong incentives to foreclose its cloud gaming rivals. The CMA also took account of Microsoft’s previous behaviour of not releasing “AAA” gaming content (high-budget, high-profile games) to other cloud gaming services other than its own Game Pass Ultimate.  However, in contrast to the Commission, the CMA did not accept Microsoft’s behavioural licensing commitments. 

The CMA also assessed whether Microsoft would have the ability to foreclose rival consoles (e.g., PlayStation) from current and/or future Activision content and make it exclusively available on Xbox or degrade access.  Activision’s Call of Duty is one of the largest franchises on PlayStation and materially contributes to its revenue and drives console sales.  However, the CMA found that Microsoft would not have an incentive to foreclose Call of Duty based on the losses it would incur from withholding content from rival consoles.

In its Phase I review, the CMA also considered whether Microsoft could leverage its “broader ecosystem” with Activision’s gaming catalogue to strength network effects, raise barriers and foreclose rivals in the cloud gaming services.  While the CMA dropped this concern during Phase II, we would expect such ecosystem theories of harm to become more important in digital transactions (including the gaming sector), as assessed by the Commission in relation to Booking’s proposed acquisition of eTraveli*.

Rematch with the CMA?  Press Y to start over

Following the Commission’s clearance, Microsoft approached the CMA in July 2023, requesting that the CMA reconsider its prohibition decision.  Microsoft argued that it was no longer appropriate to block the Transaction, as there had been a “material change of circumstances”, specifically: 

  • Since the CMA decision in April 2023, the Commission had accepted commitments from Microsoft including cloud gaming licencing agreements entered into with NVIDIA, Boosteroid and Ubitus; and 
  • Microsoft had entered into an agreement with Sony to provide Call of Duty covering both console downloading and cloud game streaming. 

The CMA found that such change of circumstances did not justify changing the prohibition decision.  It found that while Microsoft’s commitments and the signing of the Sony Agreement had some impact on Microsoft’s ability to foreclose rival cloud gaming rivals, it was not that significant and did not materially change the assessment of Microsoft’s incentives.

Microsoft’s next Call of Duty?

Microsoft appealed the CMA’s prohibition decision to the UK Competition Appeal Tribunal (CAT) but then agreed to stay that action while it, in parallel, notified a revised transaction structure to the CMA, which included a fix-it first approach. Microsoft’s revised transaction structure:

  • Did not include the acquisition of Activision’s cloud game streaming rights outside of the European Economic Area (EEA);
  • “Divested” Activision’s global cloud game streaming rights outside the EEA for all current and future Activision PC and console games released during the next 15 years, to Ubisoft Entertainment SA (Ubisoft).  Within the EEA, Ubisoft received a non-exclusive licence for Activision’s cloud gaming rights for Activision games.  To ensure compliance with the Commission’s commitments, Microsoft receives a non-exclusive licence for Ubisoft cloud streaming rights; and
  • Ubisoft will be able to license Activision’s content using any business models of its choosing including subscription services and can license cloud game streaming rights to third parties. Thereby establishing Ubisoft as a key supplier of content to cloud gaming services to replicate the role of Activision following the Transaction.

The CMA accepted the revised transaction structure as a new and substantially different deal and launched a fresh review.  In the run-up to the clearance of the revised transaction, there were claims that Microsoft was seeking to politicise the CMA process following Microsoft’s meeting with the UK Chancellor Jeremy Hunt, who later issued a pointed remark that regulators need to understand wider responsibilities. The Chief Executive of the CMA, Sarah Cardell, later stated We take our decisions free from political influence and we won’t be swayed by corporate lobbying.  On October 13, 2023, the CMA cleared the revised transaction. 

If Microsoft had offered licensing remedies instead of notifying the revised transaction, it is doubtful that the proposed remedies would have satisfied the CMA’s requirements under the Merger Remedy Guidelines (Remedy Guidelines).  When examining the effectiveness of a remedy, the CMA assesses the impact on the competitive harm, the timing, the practicality, and the acceptable risk profile.

Based on the CMA’s preference for a structural remedy and preference to avoid ongoing corporate links, the CMA may have found the effectiveness of Microsoft’s licensing commitments (and the ongoing entanglement) insufficient under the Remedy Guidelines.  Equally, the associated long-term costs related to ongoing monitoring and compliance review of the licensing agreements for a ten-year period might also be inconsistent with the Remedy Guidelines. 

Level unlocked: Takeaways

The CMA again showed willingness to divert from other agencies’ findings such as in Cargotec/Konecranes** and Facebook/Kustomer***.  In its Phase II review, the CMA did not find the behavioural remedies offered by Microsoft sufficient to remedy the substantial lessening of competition in the UK. However, when Microsoft re-notified a revised transaction structure, effectively offering a fix-it first remedy, which in practice appears much more akin to a behavioural licence remedy than a proposed structural remedy (i.e., involving a divestment of the company’s business or assets), the CMA was prepared to clear the Transaction in Phase I. 

The Transaction demonstrates the importance of structuring deals carefully when dealing with the CMA and highlights that offering late-stage remedies to the CMA might not be effective in securing clearance.

Valve: Game over?

The gaming industry also remains centre of attention in relation to antitrust conduct investigations.  On 27 September 27, 2023, the General Court of the European Union (GC) dismissed Valve’s appeal against a €1.6 million fine and confirmed that Valve infringed competition rules by geo-blocking video games on its Steam platform. 

To recap: in January 2021, the Commission imposed a €7.8 million fine on Valve and five other game publishers for geo-blocking.  Publishers of PC video games enter distribution agreements with Valve, upload their games to the platform and grant non-exclusive licences to Valve.  Valve’s online gaming platform, Steam, enables gamers to download and stream video games.  When consumers purchase Steam-enabled video games from a distributor (rather than the Steam store), they require an activation code to play the game.

In the decision, the Commission found that there were agreements or concerted practices between Valve and each of the publishers regarding the use of geo-blocking.  In the appeal, Valve disputed that such agreements had been made to restrict cross-border sales.  Valve characterised itself as a “service provider supplying nothing more than technical means of geo-blocking to publishers” without any “concurrence of wills” to engage in the alleged conduct.  However, the Commission had found that Valve “proactively” referenced the potential use of geo-blocking to restrict cross-border sales with the publishers and then made agreements with each of them to set geographical restrictions. 

The GC agreed with the Commission’s finding, as Valve was aware, or ought to have been aware, that the geo-blocking was used with this objective and found that the agreements were “by their very nature, harmful to the proper functioning of competition” as they introduced a “genuine restriction on passive sales” and led to “an artificial segmentation of the internal market”.  For example, geo-blocking caused economic harm to consumers in Western Europe as they could not benefit from the cheaper price of games in Central and Eastern Europe.

Valve’s arguments that the Commission had failed to consider that the activation codes enabled publishers to protect their IP rights which were licensed on a country-by-country basis were not fruitful, as the GC asserted that the objective of geo-blocking was not to protect IP rights, but to distort competition.  Valve can appeal to the Court of Justice on points of law.

CMA market investigation

As discussed in our last gaming update: in November 2022, the CMA launched a Phase II market investigation into the distribution of cloud gaming services through app stores on mobile phones in the UK (as well as the supply of mobile browsers and browser engines).

The CMA was concerned that the market is concentrated between a small number of firms and that Apple restricts cloud gaming through its App Store.  Apple appealed, arguing that the CMA’s decision to launch a market investigation was outside of the six-month time limit from the original market study notice.

In March 2023, the CAT found that the CMA had acted ultra vires in making a market investigation reference. The CAT also denied the CMA’s request for permission to appeal.  In the meantime, the CMA has also applied to the Court of Appeal for permission to appeal the CAT’s judgment.  Until then, its market investigation continues to be stayed.

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 * The Commission has, for the first time, prohibited a proposed transaction based on an ecosystem theory of harm - in relation to Booking Holdings’ proposed acquisition of Flugo Group Holdings AB (eTraveli). The Commission found that the proposed transaction would facilitate Booking’s expansion of “its travel services ecosystem” centred around the hotel OTA business, thereby increasing barriers for Booking’s rivals in the hotel OTA market. 

** Cargotec/Konecranes was notified to the CMA, the Commission, and the US Federal Trade Commission.  While the Commission cleared the transaction with remedies, the CMA blocked the transaction based on insufficient remedies.

*** Facebook/Kustomer was cleared by the CMA in Phase I, while the Commission referred the transaction for an in-depth Phase II review prior to accepting behavioural remedies to conditionally clear the transaction.