UK regulator blocks Microsoft’s acquisition of "Call of Duty" maker Activision Blizzard

Microsoft’s (MSFT) $68.7 billion deal to acquire "Call of Duty" maker Activision Blizzard (ATVI) has been rejected by the United Kingdom’s antitrust authority.

Following months of analysis over the tie-up, the UK’s Competition and Markets Authority (CMA) on Wednesday said the deal threatens to “alter the future of the fast-growing cloud gaming market” in a way that could lead to “reduced innovation and less choice for UK gamers over the years to come."

Activision shares dropped nearly 9% in morning trading on Wednesday, while Microsoft's stock was up almost 7%.

In response to the decision, Microsoft Vice Chair and President Brad Smith said the company remains fully committed to the acquisition and plans to appeal. Smith also accused the CMA of basing its decision on a flawed understanding of the gaming and cloud markets.

“We have already signed contracts to make Activision Blizzard’s popular games available on 150 million more devices, and we remain committed to reinforcing these agreements through regulatory remedies,” Smith said in a statement sent to Yahoo Finance. “We’re especially disappointed that after lengthy deliberations, this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works.”

Microsoft logo is seen on a smartphone placed on displayed Activision Blizzard's games characters in this illustration taken January 18, 2022. REUTERS/Dado Ruvic/Illustration
Microsoft logo is seen on a smartphone placed on displayed Activision Blizzard's games characters in this illustration taken January 18, 2022. REUTERS/Dado Ruvic/Illustration

Smith went on to argue that Microsoft’s already completed partnerships with gaming market players — including Nintendo, Steam, NVIDIA, Boosteroid, Ubitus and EE — serve as proof of Microsoft’s commitment to diverse access to gaming.

Activision, for its part, said it, too, would appeal the decision and threatened to pull back on its investment in the UK. The company also accused the CMA of contradicting the UK’s ambitions to become an attractive country for technology-building businesses.

“The report’s conclusions are a disservice to UK citizens, who face increasingly dire economic prospects. We will reassess our growth plans for the UK. Global innovators large and small will take note that — despite all its rhetoric — the UK is clearly closed for business,” the company said in a statement.

The decision on Wednesday aligns with provisional conclusions released by the CMA in February, saying that the Microsoft-Activision deal could "result in higher prices, fewer choices, or less innovation for UK gamers."

Separately, the US Federal Trade Commission — which sued to block the acquisition — and the European Commission continue to evaluate the deal.

An acquisition of Activision Blizzard would catapult Microsoft into the position of the third-largest gaming company in the world by revenue, after Tencent and Sony.

The tech giant is eyeing the deal as an opportunity to solidify dominance in the gaming industry and further eclipse Sony in the still-nascent cloud-gaming industry, estimated by data firm Newzoo to jump to $8.1 billion in 2025 from $2.4 billion in revenue in 2022.

Cloud gaming allows gamers to play titles that would normally require high-powered consoles and PCs on low-powered devices including smart TVs, smartphones, tablets, laptops, and Chromebooks.

A central concern for regulators is that Microsoft's ownership of the “Call of Duty” franchise "would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business," the FTC has said.

The latest title in the franchise, “Call of Duty: Modern Warfare 2,” topped out at $1 billion in sales over its first 10 days on the market. Cutting out Sony would mean eating into “Call of Duty’s” sales.

Microsoft counters antitrust concerns by pointing out that it offered to sign a 10-year agreement to continue offering “Call of Duty” on Sony's PlayStation on the same schedule that it offers the franchise on its Xbox. It reached similar agreements with Nintendo and Nvidia. Microsoft has previously said that the company wouldn't move forward with the deal without "Call of Duty."

The FTC has also accused Microsoft of backtracking on assurances it would keep content developed by Zenimax on third-party platforms after it acquired that company for $7.5 billion in 2021.

After the acquisition, Microsoft announced that the first new franchise in more than 20 years from Zenimax's highly regarded Bethesda studio, “Starfield,” will be an Xbox and PC exclusive. Bethesda is best known for the game series including "The Elder Scrolls" and "Fallout."

The FTC has also expressed concerns that Microsoft is one of only two high-performance console makers.

It's not just cloud gaming and "Call of Duty," though.

Microsoft would also stand to benefit from Activision Blizzard's mobile-focused King business. Mobile is the fastest-growing gaming segment thanks to the ubiquity of smartphones. And that's important when trying to reach consumers in developing countries. After all, while consumers in those regions might not be able to afford pricy PCs and consoles, they can get their hands on low-cost smartphones.

The UK’s ruling is projected to set the tone for the FTC's decision in the US, and potentially for the EU's decision, which was delayed in March.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed. By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley.

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