Key Takeaways
- The console market is seen as resilient enough that even the largest acquisition in the industry’s history wouldn't be enough to disrupt competition significantly.
- With games like Call of Duty charging steep prices, the addition of major titles to subscription services can drastically alter their value to consumers.
- Subscription-based games services are a growing but difficult market, with Microsoft poised to dominate should its acquisition of Activision Blizzard go through.
UPDATE: On 26 April, the Competitions and Markets Authority blocked Microsoft’s proposed takeover of Activision Blizzard on the grounds that it would reduce innovation and lead to less choice for gamers in the cloud gaming market. The two companies plan to appeal this decision.
The gaming industry plays a major role in the entertainment sector, capturing consumers’ imaginations and wallets. Video games are expected to have generated roughly £7.5 billion in the UK alone in 2022-23.
As cloud-based subscriptions start gaining traction, Microsoft looks to dominate the fledgling market with a US$68.7 billion (£55.4 billion) acquisition of weakened Activision Blizzard, which has been hit by a series of lawsuits regarding a culture of sexual harassment and gender discrimination.
Microsoft’s acquisition of Activision is the largest deal the industry has ever witnessed, so it was unsurprising when competition authorities worldwide – notably the Federal Trade Commission (FTC) and the Competition and Markets Authority (CMA) – challenged it. The CMA’s main investigation is focused on competition concerns for console and cloud-based gaming arising from the merger.
How will gaming consoles be affected?
Physical console retail in the UK is mostly dominated by three competitors: Microsoft’s Xbox, Sony’s PlayStation and Nintendo’s Switch. While Nintendo has (quite) successfully focused on the handhelds market, Xbox and PlayStation compete more directly with their home consoles.
Competition between Sony and Microsoft has been deemed so important for boosting innovation and supporting consumers that the CMA cited the need to maintain it as one of the reasons for investigating the acquisition of Activision.
Most major publishers of the largest games distribute their titles on multiple platforms to reach the most customers possible. Activision Blizzard is no different, with some of the largest annual releases provided to Xbox, PlayStation and PC players.
The potential loss from removing Activision’s largest titles on its competitors’ consoles means that Microsoft would be unlikely to do so. The low probability of platform exclusivity for existing titles and the strong existing competition in the industry led the CMA to update its findings and state that its investigation is now entirely focused on cloud gaming.
Subscription-based games
Much like with other types of entertainment, the landscape of gaming sales has shifted from physical to digital storefronts and recently, subscription-based services have started to take hold.
Having launched its Game Pass service in 2017, Microsoft is one of only six major game subscription services available in the UK, the others being owned by Sony, Nintendo, Electronic Arts (EA), Ubisoft and Amazon.
Like many emerging subscription and streaming services, the need to rapidly build up a customer base to offset high operating costs is a must.
Google learnt firsthand the need for a strong and unique offering with the failure of its Stadia system. Having launched in only 2019, Stadia was discontinued in 2023 after failing to attract users, mainly owing to a lack of titles unique to the platform.
Major games publishers trying to enter the arena rely on their existing offerings to draw customers in, with Ubisoft+ and EA Play being backed by a large offering of widely known games from their publishers and available on both Xbox and PlayStation platforms.
The need for exclusive titles and difficulty entering the market means that if Microsoft develops a strong enough draw, new streaming services may not be able to develop a foothold, posing a considerable threat to competition.
High price points make subscriptions a must
The largest games released often entail massive budgets; for example, Cyberpunk 2077 was released in 2020 and cost roughly £246.4 million to develop and market. These high costs and industry pricing trends mean that large companies often charge £60 or more for the base version of their largest titles.
Activision Blizzard is a prime example of a publisher that develops high-priced games. Its Call of Duty franchise follows an annual release schedule, with some digital versions costing as much as £100.
Not only would the acquisition of Activision Blizzard provide a considerable source of revenue for Microsoft, but it significantly affects the value proposition of its game subscription service.
Rather than comparing the costs of a game between digital storefronts, the cost is now compared between a competitor’s storefront and the much lower £7.99 monthly fee of Microsoft’s game subscription service.
Even if the FTC and CMA accept Microsoft’s claims that it would continue to offer major titles on all platforms, this wouldn’t alleviate the advantage granted to Microsoft’s subscription services by acquiring additional major titles.
How is the merger looking in the UK?
The CMA’s assessment of the acquisition is expected on the 26 April. Should the CMA conclude that the Microsoft-Activision Blizzard merger substantially damages cloud gaming in the UK, the issue could go to the Competition Appeal Tribunal (CAT), where the odds of a decision reversal are historically slim.
In the event of a blocked merger by the CMA and CAT, Microsoft and Activision Blizzard would be unlikely to continue the merger due to the precedent set for other regulators and the importance of the UK market to both companies.
Going forward, it’s clear that regulators will have to consider how exclusivity between platforms differs from exclusivity between subscriptions, with the Microsoft/Activision Blizzard case setting a powerful precedent.
