The CMA's handling of the Xbox-ABK deal is creating a political headache for the UK government
Bad math and poor understanding of, well, reality, is harming the UK's image on the global stage.
Activision CEO Bobby Kotick predicted that the UK would become a tech investment "Death Valley," as opposed to a European "Silicon Valley" should it block the big Microsoft-Activision merger. His comments may end up being prophetic.
A few weeks ago, the UK CMA sensationally voted to block Microsoft's merger with Activision Blizzard (ABK). The deal is worth almost 70 billion dollars and stands to give Microsoft control over franchises like Call of Duty, Candy Crush Saga, and World of Warcraft. The deal is one of the biggest ever made and certainly the biggest gaming acquisition ever made, and it has been fraught with regulatory constraints since its inception.
Whatever your opinion of the deal is, one thing is for sure: the ABK deal is increasingly creating a political headache for the UK government, particularly now that the European Union has unequivocally approved the Xbox-ABK deal. Prime Minister Rishi Sunak has espoused a philosophy of "deregulation" to promote investment. As many of the sputtering claims from Britain's political classes (of all sides) in the post-Brexit world, Sunak's declarations on regulation increasingly look hollow — uncredible platitudes to his party's Laissez-faire fantasists' wing. The UK is technically more regulated than ever, with the heaviest tax burden in decades — all from the purported party of "low tax."
These are just a few things coalescing at the wrong time for Sunak's government, with the ABK deal likely a tiny blip on the government's wider flaming heap of problems. For global investment into the UK, though, the ABK deal has become something of a focal point.
In any case, this piece isn't about whether or not the deal is good or bad, but it's an observation of how the ABK deal has become political and how Microsoft's options to get the deal through may increasingly lie with the government.
A tech investment "Death Valley"
If Sunak wants to make the UK an attractive place for the world's biggest and most innovative companies to do business, he needs to make it as profitable as possible to do so. In a world where it's easier to do business in the European Union, a bloc notorious for red tape, it could be argued that the government has utterly failed in its stated goals. Sunak and his ilk purport to make the UK a "deregulated" haven for tech investment, akin to Silicon Valley, with fast-paced innovation and high-tech jobs.
The UK government can technically overrule the CMA in some instances, but it's a mechanic not often used. We have little information on the government's thought process concerning the ABK deal and the CMA's block on the said deal. However, the government did feel the need to offer a vanishingly sheepish rebuttal of Microsoft President Brad Smith's comments that the UK was no longer as attractive as the EU to do business.
A few days after the CMA's decision, Sunak posted a significant treatise flanked by a giant red banner proclaiming to "reduce red tape" to boost business in the UK. Therein, Sunak described plans to "strategically steer" the CMA without offering further clarification. Today, that same CMA has been appearing in front of a government committee to explain its role as of late. This comes after some damning coverage in the hugely influential Financial Times and other business-oriented outlets, many of whom have criticized the CMA's handling of the ABK deal. It's perhaps not without a sense of irony that Sunak chose to post his proclamations on LinkedIn, a social network owned by Microsoft.
The UK CMA took some tough questions from the UK parliamentary oversight committee in a hearing covered by FossPatents on Twitter, which you can view in complete video form from EverbornSaga here. Indeed, the UK CMA came out almost immediately with a defense of its decision on Twitter following the European Commission's approval of the deal, which came across as oddly precious. I was unable to find another example where the CMA felt the need to "respond" to a contradictory regulatory decision from the EC. The only real reason they would feel the need to do so is to manipulate the optics — and given the sensitive nature of UK-EU relations both inside and outside the country, the CMA has somewhat put itself on the back foot. Many elected parliamentarians and commentators in business are questioning the CMA's logic on the block, which focuses on the nascent "cloud gaming market," of which Microsoft only can serve five thousand users at once.
Indeed, Microsoft threw a somewhat uncharacteristic tantrum when the deal was blocked, calling into question its investments in the country and pointing to the EU as a better place to do business. The BBC even wrote an article with the headline, "Is the UK a bad place for tech firms?" in response to the comments, examining a raft of recent problems the UK has created for Big Tech. The CMA oddly blocked Facebook from acquiring Giphy last year, a platform that delivers small, pixellated animated gifs to Instagram and other platforms. Is the CMA worried about competition in the gif economy too? The UK is also exploring legislation to kill end-to-end encryption, which has led to threats to leave the market from companies like WhatsApp and Signal. The UK's crown-jewel tech firm, ARM, also opted for a listing on the New York Stock Exchange instead of London, which has been seen as hugely embarrassing for Sunak and the Tory government at large.
These are just a few points of "chaos" the Tory government has created for the tech sector in the UK in recent years, disregarding the absolute post-Brexit clusterfuck that is hiring and importing from the UK's closest trading partner.
Satya Nadella on Microsoft-Activision dealCould you ever see an age where you sell the product in the US if it was approved, sell the product in Europe, but not sell it in the UK if they did not approve it? Satya:"Let's wait, for all to play out."https://t.co/GLYW4pXvg6 pic.twitter.com/6slqgx2ShuMay 16, 2023
In the current political landscape of disingenuous partisanship, neither "side" has really taken a public stance on the Activision-Blizzard deal. I suspect this is simply because there are far more pressing matters impacting the UK right now, but if one party breaks cover, the other party will predictably take the opposite stance. I could see a spin on one side that reads something like "overzealous regulator kills UK jobs!" and in the other ear, "weak EU bows to American megacorp!" But much like Brexit itself, the consequences of these decisions could have real-world implications for the UK. Microsoft CEO Satya Nadella today, with a wry smirk, said, "We'll wait and see how it will play out" when asked by CNBC if it could pull Xbox products out of the UK if the CMA continues to block the deal. What a staggering and predictable own goal that would be.
Whatever happens in the public sphere, behind the scenes, the CMA's questionable math and omissions have made both Microsoft and Activision incredulous. I suspect that there's little chance Microsoft or Activision will abandon the deal, given how much money is at stake. With the CMA digging its heels in, things could get pretty nasty down the line.
The vision sold to the public and Tory MPs was that Brexit would lead to something of a deregulation paradise, where the Glory of Capitalism™️ would bring down prices, create jobs, and produce innovative technologies that would boost the economy. The reality has unsurprisingly been quite the opposite.
Based on cold-hearted math and eyes-wide reality, Brexit has been a cover-to-cover, unmitigated disaster for the United Kingdom thus far, with even the vaguest post-EU "opportunities" entirely squandered by the current government. The UK economy is set to perform worst out of the so-called G7 group of developed nations, with inflation at 10%, set to miss Rishi Sunak's own targets of "halving" it by the end of 2023. The invasion of Ukraine has impacted energy prices, which has given food stockists a license to arbitrarily raise prices in some cases while being forced to do so in others. UK strike action has been near-constant as staff seeks higher wages to offset a spiraling cost of living crisis that has seen the ruling government suffer the worst local elections loss for over two decades. A cycle of dodgy insider deals with a revolving door of costly tax-payer-funded health system privatization has brought the health service to its breaking point. At the same time, Covid-era contracts-for-your-mates have seen billions of pounds mysteriously vanish from the UK treasury. All of this is against a backdrop of madmen across the North Sea threatening to trigger a nuclear apocalypse rather than lose a war they started for ill-defined, psychotic reasons.
Yes, the government has far more significant things to worry about than Call of Duty.
Whether the status quo over the world's biggest shooting franchise is preserved or not, there are far bigger, far more impactful things going on within the United Kingdom that demand some form of sensible, capable attention — an attentiveness the UK's political class seems woefully lacking in. That's why we're supposed to have regulators, regulators that regulate the regulators, and democratically elected Parliamentary ministers whose responsibility is to regulate the regulators who regulate the regulators.
The video https://t.co/9yPGJ49FJf pic.twitter.com/KCumNhuOpRMay 16, 2023
Microsoft's operating profit in the UK is "only" in the hundreds of millions in the UK, which is a minuscule portion of its global operating profit. Despite this, Microsoft is a huge investor in UK jobs, with thousands of employees working in different departments. Rare, Ninja Theory, Playground Games, and others are based in the UK, with Microsoft investing in reams of other UK studios on a third-party basis. Brad Smith's threats to "reconsider" investment in the UK might have just been political theatre. Still, after the bruising SoftBank's ARM just gave to the London Stock Exchange, I suspect the government may think twice about calling Microsoft's bluff.
Before Brexit, the UK enjoyed a privileged position within the bloc, acting as a financial go-between brokering deals between different nations. After Brexit, the UK is economically floating into the Atlantic, directionless, with political classes struggling to offer a serious vision for what its future looks like. Vague aspirations to become Europe's "Silicon Valley" fly in the face of technologically-ignorant anti-encryption legislation and aggressive and inconsistent regulatory rules have left major firms with a sour taste. All the post-Brexit UK ruling classes have shown the world thus far is a complete lack of understanding of how the tech sector works, which isn't precisely becoming of an import-dependent nation so desperately in need of outside investment. I'm still reminded of our previous tech minister's laughable inquiry, where she asked why Microsoft hasn't yet "banned" the concept of algorithms — as if Microsoft was the omnipresent central authority on such things.
For something like cloud gaming to actually take off, you need the backing of mega-corporations like Amazon and Microsoft to get over that initial hump of investment before profit. Few companies in the world have the global infrastructure necessary to set this stuff up, and Apple and Google's payment duopoly — actual monopolies that threaten innovation — prevent small players from making their businesses financially sound. The European Union's remedy of forcing Microsoft to offer ABK's games license free to smaller companies is the correct decision to help the industry grow and thrive and offer a credible alternative to Apple and Google's dominance on mobile platforms. The CMA's decision flies in the face of all logic and reason, baffling experts on all sides.
None of this is an argument against regulation. It's an argument in favor of sound regulation. Nobody with a sound mind would argue against competition regulation, given that it's the basis of our economy and one of the few incentives to innovate and compete on consumer prices. Conspiring companies can artificially inflate prices and harm competitors who may have great products but get crushed before reaching the mass market. When regulation is working correctly, it is supposed to lead to consumer benefits. The CMA's decisions here have a real risk of harming UK consumers. While I find it unlikely Microsoft will pull its operations out of the UK in their entirety to see this deal through, I could envision some kind of solution that results in UK Xbox fans losing out on Xbox Cloud Gaming or losing out on ABK games in Xbox Game Pass. It would be a predictable self-own.
The CMA has done some great and vital work in the past, but on the ABK deal, it's clear that it has barked very loudly up the very wrong tree. The headache for the UK is that everybody in tech has now seen, plain as day, that the UK doesn't "get it" on tech. Furthermore, Rishi Sunak's pledges of "innovation and investment through deregulation," good or not, exist only as libertarian fanfiction in a LinkedIn post, serving nobody but Sunak's overactive imagination.
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On the high political philosophy and my opinion:
As Jez said, yeah, regulation is pretty much the antithesis of the libertarian model, so if Sunak does personally support this block on regulatory grounds, sure sounds like he's on the left, not the right (or has some ulterior motive at work). Some regulations are important, but governments almost always go way too far in their pursuit of power. In general, every regulation smothers innovation, subtracts from the economy, and hurts jobs.
Now, that's not to say that some regs aren't absolutely worth those costs and then some. I think we'd all agree that regulating to prevent dumping nuclear waste on the side of the road is probably worthwhile. At the other end of the spectrum, most of us would probably also agree that governments should not regulate what colors companies choose to make their products. Between those two extremes is where we all have different opinions.
My take on gov't regs on acquisitions: the burden of proof should be on the gov't agency to prove beyond a reasonable doubt to a court that the acquisition will break some law (e.g., forms a monopoly), not just that it doesn't adhere to some nebulous philosophical objective of the then current government preferences. If it can't prove a law will be broken, then the parties should be able to proceed with the transaction, if they both wish. The burden of proof should not be on the parties who wish to conduct a private transaction to prove the negative that they're not going to break a law as a result of the sale.
the cma is an independent body that follows some legislative processes outlined by elected ministers. it's kinda unknown what sunak personally thinks of the abk deal block. but our "conservative" party is very much to the left of the american definitiion of conservative. they're closer to center-right, or perhaps really clsoer to true centricism, with a dash of pandering to made-up culture war outrage imported from america.
the way the uk regulatory process will play out is largely how you describe. the regulator that regulates the regulator will put a burden of proof on the CMA to prove that their block makes sense within the confines of competitive legislation. hopefully. the issue is that the people in these positions largely seem incompetent, with only a surface-level understanding of the gaming industry, what "cloud actually is", and things of this nature. it's absurd that the UK can block a deal at a gloabal level, impacting millions of gamers across the world, based on what amounts to illogic. i suspect microsoft will opt to either produce some kind of remedy in partnership with the UK government (who has ultimate authority to overrule the CMA) that will satisfy the so-called "concerns" of the market authority, while allowing the transaction to continue.
probably what will ultimately happen is UK consumers will get fucked over in the end. like usual.
Thanks for that excellent article that looks both at the smaller and larger issues of it all.
the boost the Xbox-AKB deal would give for a "Microsoft/Xbox store for Games, Apps and more on mobile devices" would be very much welcome.
Finally adding some competition to the "Apple App Store and Google PlayStore Duopoly" in combination with the EU's digital services and platform act regulations.
Also this could also potentially allow for Microsoft to build it out it's own "Android variant" that isn't dependent on Google's whims.
But the question comes back to other regulations that don't make sense. Things like patents, trademarks, IP laws are all government regulations and shouldn't exist. These are direct regulations of the 1A and have zero reason to exist.
These fools like Rishi aren't libertarians either. I'm a true libertarian. I don't believe in many government regulations. These fake libertarians only believe in regulations that maximize corporate profits. But you ask them how they feel about scrapping all IP laws, and suddenly they turn coat into true blue commies.
Always enjoy discussing these topics, as long as we all recognize we each have our own opinions and no one gets angry at hearing alternative viewpoints. And this gets a bit afield of the topic Jez was writing about. :)
I strongly agree with parts of what you wrote, but disagree just as strongly with others. Interestingly, I also consider myself a libertarian (small L, not a partisan). I want liberty and freedom for all, with regulations only as absolutely needed, whether that's on personal liberties or business regulations. Or to put it in standard libertarian colloquial terms, I want the government to stay out of my bedroom, out of my wallet, and out of my way.
I'm a capitalist, believing that free enterprise is the best way to help the most people over time, which I would argue is not a matter of opinion, but a provable fact, with the vast majority of advances in technology, standard of living, lifespan, etc. since feudal times trace to innovations driven by profit motives. We can also see this in a snapshot in time by looking at countries that rapidly escaped third world living conditions thanks to Capitalism (Taiwan and South Korea being the strongest examples). I know some disagree. In my experience, those who disagree lack the knowledge on the relevant aspects of economic history.
I give that as background when I say that patents and IP laws are ESSENTIAL to freedom, just like all rules intended to protect private property rights, as opposed to collective or government control over property. If I invent something and I can't patent it, I effectively don't own my own thoughts or the right to monetize them. That's just another form of redistribution and socialism -- absent the ability to patent if I so choose, what I create belongs to everyone. Patent laws are effectively a contract with society: in exchange for telling everyone my idea and how to make it, I get a relatively brief (20 year) period of exclusivity to monetize my invention. After that, anyone can make it. If I don't want to share my invention, I don't have to seek a patent. I could instead keep it as a trade secret, but then I don't get the legal protection of a patent and anyone else can try to reverse engineer it and sell it without fear of a lawsuit. The patent is that trade -- teach others in exchange for legal protection against IP theft.
I also don't want regulations on everything that might have some negative consequences. That would make sense if the regulations themselves had no cost to society, but they do have a cost, a huge cost. Every regulation on businesses is a set of hurdles that smaller companies struggle to manage. The more regulations the tighter the web and tougher to start a new business. Larger companies can allocate a portion of their budget, a cost they ultimately pass along to customers raising prices across the board, to lawyers (and lobbyists) to manage these matters. For this reason, regulations almost universally help big companies by protecting them from smaller entrepreneurial upstarts who could otherwise topple their technological leadership.
Less regulation = faster technological advancement. And technological advancement benefits everyone, especially those at the lower end of the income spectrum, because technology is what drives down costs making what was once only available to kings available to all.
Therefore, I only want regulations for things that a sizeable majority agrees is a serious problem AND that can't be managed by the free market. Pollution is a good example of an area than warrants regulation. Absent regulations, a company would have an economic incentive to pollute, because of the huge cost savings to dumping and the ease of hiding that from customers who might otherwise discourage it via boycotts. A bad regulation would be that no one is allowed to buy or manufacture an incandescent bulb, something that would be perfectly controlled by the free market. *IF* most people agree that incandescent bulbs are bad, then there would be no market for them (or so small as to not be worth pursuing) and they'd fade into obsolescence. If that doesn't happen, then the people who oppose them should acknowledge that they have no right to force their product preferences on others. There is no role for direct regulation in that. (I say this as someone who doesn't own or want a single incandescent bulb; I'm all LED, all the time, but I have no right to force that product preference on anyone else.)
This is a great time to completely abolish all ip laws and let the free market work as it was intended to from the beginning. You call it socialism, I agree it's socialist to have such things like patents and IP in the first place. And many of these companies are leeching massive profits from this socialist system.
I agree with your other points. But again government needs to step in when something is causing collective damage to society if left unchecked. Water poisoning from industrial process, the pollution from plastic, the carbon emissions, acid rain, and far more things.
Seems appropriate to the moment.
The CMA had already presented themselves in a poor light by accepting SONY's lies as fact until faced with unavoidable facts and witnesses before admitting MS buying APK was no threat to existing markets and pivoting to cloud gaming as an excuse to give SONY the outcome they craved. But then, when they saw the EU agree with MS, they failed to remain silent and wait out the appeal. No, they had to speak up and expose their true motivation. It's not about gaming at all. It is all about Microsoft.
"Microsoft’s proposals, accepted by the European Commission today, would allow Microsoft to set the terms and conditions for this market for the next 10 years."
Guess what, CMA? Set terms and conditions is *exactly* what market leaders do. They set the baseline for competition that competitors must match or better.
That is literally what free and open competition is about.
And when it comes to cloud gaming, where nobody is making significant money, MS is the clear leader. The EU recognized this and asked for and got assurances that MS will not be handicapping would be competitors (as SONY regularly does) and extracted terms that are if nothing else, NVIDIA and AMAZON's fondest dream: single sale cloud support.
Does anybody remember when Nvidia launched their cloud service? They intended to let their subscribers play on the cloud the games they already own. It was promptly shot down by UBISOFT and other publishers who demanded separate pay for cloud gaming under the view that playing their games on any platform required a platform specific license.
Microsoft allows buy once "PLAY ANYWHERE" between XBOX and PC on some games and now their deal with the EU requires them to do the same for cloud. All the players that already signed up with MS.
(In other words they agreed to do what they wanted to do all along.)
Such an awful, awful deal for consumers, right?
Buy a post deal Activision game, play it on XBOX, PC and your cloud provider of choice. All for the same price. "Buy once, play everywhere."
Yes, MS is setting the rules for the next decade because, who else could? Google is gone. Nvidia tried but they're at the mercy of the publishers. Amazon is years away from mattering. And the rest are at best startups hoping to find customers.
So wake up and smell the tea, CMA.
You may hate MS with a vengeance but you're on the wrong side of rationality on this one. Best shut up, let the appeal play out, and salvage a bit of dignity.
Because not only is MS is in the right here, the Activision staff, retailers, and competitors and *organized labor* are all behind MS. And so are the American politicians. Just ask the Japanese trade negotiators how their last interview played out. And last I heard, the UK desperately needs a free trade deal with the US. Which has to be signed off by the Senator from Boeing, among others.
As the headline says, picking a fight with a multinational you hate is one thing. Picking a fight with two continents *at this time* is another.
This not going to go the way of GE-HONEYWELL.