New Zealand concerned that Microsoft could weaken its cloud gaming rivals' ability to compete following Activision deal

New Zealand’s Commerce Commission has listed concerns it has over Microsoft’s proposed acquisition of Activision Blizzard. Just like the UK regulator, it believes that the deal could lessen competition in the cloud gaming market.

What concerns does the New Zealand regulator have about the Activision Blizzard deal?

According to a Statement of Issues published on June 20, the Commerce Commission thinks that Microsoft’s acquisition of Activision Blizzard would have no horizontal effect in any relevant market* because there will remain “several well-resourced competitiors and the merging parties do not appear to be each other’s closest competitor.”

*Relevant markets, according to the Commission, are PC/console devices, mobile devices, cloud gaming services, and the supply of video game consoles.

The main stumbling block is the potential vertical effects the deal might have in the cloud gaming market:

“We are concerned that these effects may arise as a result of the merged entity either partially or fully foreclosing its rivals in cloud gaming, such as Sony or NVIDIA, from accessing certain Activision content, and in particular the game Call of Duty (CoD), to the detriment of competition in cloud gaming.”

• If Activision Blizzard games are sufficiently important to driving sales of cloud gaming services, Microsoft could have “both incentive and ability” to weaken its rivals ability to compete by making these titles exclusive to its platform;
• Microsoft could refuse to license Activision games to its cloud gaming rivals in New Zealand;
• The company could increase the prices and/or worsen the terms it offers to third-party publishers to host their games on its cloud gaming service.

The Comission also considers potential risks in the console market. Microsoft could foreclose Sony and other rivals from accessing Activision titles or degrade the quality of Activision content on rival platforms, which may lead to some users switching from other consoles to Xbox.

“If the Proposed Acquisition gives Microsoft the incentive and ability to do this, consumers (gamers) may be harmed through higher prices, lower quality, or less innovation in these markets.”

When will the Commerce Commission rule on the Activision Blizzard deal?

• The New Zealand regulator plans to further investigate the merger to test its concerns and see how Microsoft and Activison will address them.
• It wants both companies and other interested parties to provide submissions and supporting evidence by July 4.
• The deadline for the Commission’s final verdict is set for July 17. But this date may change as the investigation progresses.

Why is the regulator so concerned about cloud gaming?

• The Commerce Commission acknowledges that cloud gaming is a nascent market and it is hard to say how competition will evolve there, but is “widely expected to continue to grow rapidly as technological limitations are overcome.”
• It also believes that the market has high barriers to entry due to the need for cloud computing infrastructure and a rich content library. According to the regulator, Microsoft has significant advantages over its rivals because it already has a powerful Azure platform and “control over a wide variety of games.”
• “If Activision’s library of gaming content does contain must-have games, this advantage could be such that Microsoft’s rivals (either current or potential) in cloud gaming could not compete effectively if they are foreclosed from distributing this must-have content,” the Commission said.
• It is worth noting that Microsoft has already signed 10-year deals with NVIDIA and Boosteroid, two cloud gaming services also available in New Zealand, to bring Call of Duty and other titles to their platforms.

These are the same arguments that the UK’s Competition and Markets Authority (CMA) used when it blocked the merger in April. Microsoft later appealed the ruling, saying that cloud gaming services and native gaming are substitutable. So if players can switch between these ways of consuming products, they are both part of the broader games market, which makes the CMA’s definition flawed.

It is worth noting that New Zealand’s Commerce Commission likely won’t play a key role in clearing or blocking the $68.7 billion deal. Its fate is currently in the hands of the CMA and the US Federal Trade Commission, with the latter now trying to block the merger in court.