Admitting Errors: Microsoft and the UK Must Take Responsibility

The approval of Microsoft Corp.’s $69 billion acquisition of games publisher Activision Blizzard Inc. by the UK competition watchdog should lead to reflection and criticism from all parties involved. The UK achieved a positive outcome, but the process was unnecessarily prolonged and unstable. Microsoft’s public criticism of the UK was detrimental to its reputation, and British politicians appeared to be influenced by it, which is concerning. The regulator, the company being regulated, and the government should take this as an opportunity to learn valuable lessons.

After blocking the deal entirely in April, the Competition and Markets Authority on Friday celebrated Microsoft’s proposed revised deal as good news for cloud gaming – an area where the world’s top regulators agreed the deal as originally structured would hurt consumer choice. The concern was that Activision’s wildly popular catalog, including the Call of Duty first-person shooter, would give Microsoft an undisputed lead in this nascent market.

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Great Britain did the most to bring the deal to a consumer-friendly conclusion. Opposition from the US Federal Trade Commission got nowhere. It had to prove the disadvantages of the commitment in court, but it did not. The European Commission backed down after Microsoft proposed giving gamers a free license to play purchased games on rival streaming platforms. The UK rejected this regulation, fearing it would stifle other business models, such as cloud services that offer Activision content directly without the player engaging with Microsoft first.

This impasse has been resolved when Microsoft invited French game publisher Ubisoft Entertainment SA to take over the distribution of Activision games via the cloud (outside of Europe). The UK said this was a “game changer”.

The journey to this solution has been very ugly. First, the UK had to ignominiously scale back its “interim observations”, in which it set out its opposition and reversed earlier concerns about the impact of console gaming. This revealed deficiencies in data collection and modeling.

The CMA block then made Microsoft behave like a spoiled child who hadn’t had its way, going way too far in its criticism and suggesting that the UK was a bad place for tech investment. This made it look like exactly the kind of bullying domineering company we need tough regulators to challenge. Despite the reputation, the tactic unfortunately seemed to have an effect. UK Chancellor of the Exchequer Jeremy Hunt suggested that regulators should consider economic growth when making decisions, suggesting the CMA was wrong to want to protect consumers from big business.

As CMA said when it made the deal, the tactics used by Microsoft “is no way to engage with CMA.” Pretty much right.

And when Microsoft appealed the deal, it was clear that the CMA was ill-prepared for the ensuing legal battle. Microsoft emptied the pool of top lawyers, prompting the CMA to ask the judge for more time to assemble a legal team. The US company then presented a new deal, prompting a new merger investigation. Checking this second event may have been a pragmatic approach. But it set a precedent for the merging parties to have another piece of the cherry after the investigation should already be comprehensive — preventing concessions from being made early in the process.

The good news is that the CMA is consulting on how to better conduct thorough merger investigations. The flow of information between all parties could be improved. Merging parties appear to be left guessing what the CMA’s preliminary findings may be, preventing the watchdog from hearing useful challenges to its thinking before making public statements. Evening out the differences more quickly would minimize the need for U-turns that damage CMA’s credibility and force a rewind.

The European approach at least gives companies more visibility to the regulator’s reasoning behind previously closed doors. It may be less transparent to the wider market at first, but more constructive in the end.

And it goes without saying that Downing Street should allow an anti-competition watchdog to assess deals on the facts and ensure it has the resources to fight potentially dirty fights with multibillion-dollar giants – all in all, it’s worth supporting, not undermining.

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