Microsoft Activision Deal Struggles with the New Normal

The ongoing Microsoft Activision saga saw two more twists last week, with neither favorable to closing the deal. While these are unlikely to kill Microsoft's $69 billion acquisition of Activision Blizzard, these developments, less consolidation-friendly regulatory environment seriously.

One-Two Punch
The dual setbacks come in the form of the American FTC and European regulators. In America, Politico reported that, though undecided, the FTC is leaning toward filing suit in court to block the deal. The regulatory body’s main concerns appear centered around whether Microsoft will use Call of Duty or other future titles to squeeze out competition.

  • The FTC didn’t find testimony from depositions of Microsoft CEO Satya Nadella and embattled Activision boss Bobby Kotick convincing
Across the pond, Microsoft is attempting to put out regulatory fires by putting forth to EU antitrust regulators concessions.
  • Reuters is reporting that Microsoft will offer Sony a 10-year licensing deal to keep Call of Duty on PlayStation
  • In Microsoft’s words, "Sony, as the industry leader, says it is worried about Call of Duty, but we've said we are committed to making the same game available on the same day on both Xbox and PlayStation. We want people to have more access to games, not less."
The Big Picture: Beyond the Microsoft Activision Deal
As we’ve mentioned previously, the days of regulators signing off on multibillion-dollar deals with minimal scrutiny are a thing of the past (at least as long as the political winds push the FTC to be more aggressive). Oddly enough, the gaming industry got a preview of this last month in the literary publishing industry, with the collapse of Simon & Schuster’s acquisition of Penguin.
  • The merger of two leading publishers over concerns it reduced competition would harm content creators (authors, not video game devs, in this case)
  • Simon & Schuster’s (rejected) argument that the deal was needed to compete with a much larger Amazon are similar to Microsoft’s claims of needing Activision to compete with a larger Tencent or PlayStation
The Clock is Ticking 
Winning court battles won’t be enough: If Microsoft wants to close the deal under current terms and avoid a $3 billion break-up fee, it must do so by July 2023. Activision isn’t off the hook either, given how much baggage its current leadership has, not to mention a likely talent exodus of those sticking around in hopes of improved compensation from Microsoft.
It may not be as neat as originally planned, but we still think the Microsoft Activision deal goes through. The Call of Duty concession is a good start, and it’s worth noting that it isn’t even that much of a sacrifice.
  • Selling consoles at a loss makes it more profitable to increase games sales, rather than console purchases
  • Most of Activision’s revenue is from microtransactions, which benefit from larger player bases
  • Microsoft could still favor itself with platform-exclusive content or by favoring development of non-PlayStation versions of games

Image courtesy of Activision Blizzard