I am not a merger apologist. I don’t think the world is better off at all with fewer and fewer companies at the helm! But of all the reasons to block Microsoft’s $68.7 billion acquisition of Activision Blizzard, I never dreamed it was “We need to stop Microsoft from dominating cloud gaming.”
Yet that’s exactly what regulators chose on Wednesday, when the UK’s Competition and Markets Authority ruled that the deal could “change the future of the fast-growing cloud gaming market, resulting in less innovation and less choice for UK gamers in years.” They are denying the deal, which was widely expected to be approved, leaving Microsoft and Activision Blizzard hoping for a decision from the European Union next month.
I’ve read hundreds of pages of documents, and most of the CMA’s argument is: Microsoft is so dominant in cloud gaming today that it could control its entire future.
And I can’t help but laugh because that means the deal could be off, no because cloud gaming is booming but because cloud gaming is still bad! Microsoft is being punished because Google Stadia completely failed, because Amazon Luna went nowhere fast, because Sony got distracted, because Nvidia can’t stream the games you bought without talking to every publisher and developer under the sun.
It might die because EA and Verizon and AT&T largely backed out after they realized the infrastructure costs to do it right didn’t justify weak demand from gamers, and that — 5G or not — a phone isn’t a great replacement for a gaming console. It might die because Apple was so afraid of dumbing down cloud gaming that it arbitrarily made new App Store rules that block the iPhone.
With so little real competition from Microsoft xCloud looks like dominant, especially when you consider that Microsoft bundles it with every subscription to Xbox Game Pass Ultimate — whose subscribers, as far as we know, get to try xCloud once and never. (We’ve asked Microsoft to clarify the monthly active user figures it provided to CMA, which is unclear.)
Microsoft is a big fish in a small pond. And paradoxically, the UK’s decision could help preserve it.
Activision Blizzard’s deal could have been the biggest cloud gaming hit ever, as Microsoft promised huge concessions to other players in the market. Did you know that Microsoft promised to put all of its computer games every suitable cloud service for their release day for 10 years, if the deal is concluded? In theory, Nintendo could have set up their own servers to get them Call of Duty running on Switch with Microsoft’s blessing. Smaller cloud gaming providers would also have had access.
Did you know that Microsoft has promised to change the entire business model by giving every game owner the right to stream their games to their devices from a service of their choice, instead of the status quo where Nvidia has to acquire the rights games you already own before it can stream them to you? It was also a 10-year promise:
Microsoft will unilaterally grant a license to any consumer who has purchased or obtained a free license to play a computer game from an authorized third-party PC digital store (“Eligible Game”) to stream the game through an established PC consumer cloud game. for a device owned by the supplier (“Consumer License”). Microsoft will grant the consumer license by posting it on Microsoft’s website. The consumer license will be granted for a term.
Nvidia’s GeForce Now boss told me that the 10-year promise could break the chicken-and-egg cycle by providing enough games to attract enough players to convince publishers to bring more games to cloud gaming services as well. “This period is long enough for cloud gaming to become a consumer service and for service providers to provide a range of popular games,” Microsoft argued.
Note that Microsoft’s promises are quite self-serving because they bleed into Microsoft’s core business. If you wanted to stream Microsoft’s cloud-based PC games, you’d probably invest in Windows servers and maybe even Microsoft’s Azure cloud platform to handle the load, as Sony explored for a while. You can also put any plans to create cloud games for Linux on hold. Apparently, Microsoft planned for this keep all revenue from game sales and in-app purchases instead of sharing them with competing cloud providers as well.
And the CMA makes some very good points about barriers to entry. There are precious few companies with the technology and know-how to power cloud gaming, Microsoft being one of the biggest, and it’s the only one with a PC platform that game developers really relate to en masse. (Google reportedly paid the developers tens of millions of dollars about the game to switch to Stadia Linux instead of Microsoft Windows to give you an idea of the uphill battle.)
For new entrants without an existing gaming console (including its games and operating system), we’ve determined that this catalog is most likely to come from games currently available on PC OS, as they can be streamed from any cloud gaming service that works. this operating system (provided an appropriate licensing arrangement is in place). As such, these cloud gaming providers will require a proprietary PC OS license such as Windows, the operating system for which most PC games are designed.
Sony might have a hard time competing with Microsoft in this space — although Sony, not Microsoft, bought IP from OnLive and Gaikai, bringing the patent collections of the two cloud gaming pioneers under one roof.
The CMA says it believes Call of Duty “could significantly impact the success of the cloud gaming provider” and that Overwatch and World of Warcraft could help, but that’s why blocking transaction rather than letting it go through.
But if Microsoft can show that cloud gaming is actually good business by offering a large enough collection of games to attract and retain players, that would be a first and how to could finally encourage the investment the technology deserves.
However, it’s never a good idea to take a company’s merger promises at face value. One of the biggest reasons why the CMA is blocking the deal is that it doesn’t think it can hold Microsoft to its word:
The complexity of the remedy in a dynamic and evolving market also meant that it was at high risk of circumvention and would have been difficult to monitor effectively. Given these shortcomings, we could not be sufficiently confident that the Microsoft Cloud Remedy would have addressed our concerns, and we found that the only effective remedy for SLC was to prohibit the merger.
And I agree that it would be all too easy for Microsoft to subtly poison their promise if they wanted to.
Microsoft wouldn’t need to do something as dramatic as make Call of Duty exclusive to its cloud gaming service, as CMA says it fears. There are a lot of technological mistakes just waiting to happen.
Cloud games does to work and can perform just fine, giving you an experience approaching that of a high-end gaming PC when things are right. But it depends on a lot of things that work that way — not just your internet speed, but Wi-Fi congestion in your neighborhood, the physical distance of the company’s cloud gaming servers from your home, the interoperability arrangements and handshakes required . bits across the internet and bring the image back to your screen, virtualizing the game controller you’re using and so on.
I’ve been covering cloud gaming for over a decade, since the days of OnLive and Gaikai, and now I’m telling everyone that the cloud gaming market won’t take off until the friction goes away. But it also means there are plenty of places where Microsoft could create friction, or not create friction, with its cloud gaming competitors over the next 10 years. Even if Microsoft isn’t intentionally sabotaging competing services, there are ways it can accidentally screw things up for those who depend on its platforms.
There are other technological challenges that continue to hinder a vibrant cloud gaming market, including the need for most major gaming companies to have an entire graphics card for each player in the server room. Sony, which once kept a PlayStation 3 in a server room for each cloud player, is among those looking for a way to prevent this. Now I wonder if Sony will worry now that Microsoft is looking like less of an option at the same time and slightly smaller than the competition.
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