Microsoft gives the UK what it wants. Pretty much

Activision owns bestselling titles such as the first-person shooter franchise Call of Duty. (Source: Bloomberg)

Microsoft Corp has launched a major modification of its controversial $69 billion deal for gaming-software rival Activision Blizzard Inc. Like those irritating Windows updates, installation and reboot will be a tortuous affair. But the pain and the wait may well be worth it for all sides.

The rejig has been constructed to assuage the concerns of the UK’s Competition and Markets Authority, which had blocked the acquisition. As things stand, the regulator remains the chief obstacle to the transaction closing. European trustbusters have already granted approval. The US Federal Trade Commission, which needed to prove its case before a judge, lost in court.

At issue is the effect that Microsoft’s control over Activision’s highly popular catalogue would have on the nascent but growing market to stream games from the cloud. Activision owns bestselling titles such as the first-person shooter franchise Call of Duty. The CMA feared Microsoft’s cloud rivals would be unable to compete effectively if the tech giant’s streaming platform got such a big jump start.

Microsoft initially attempted to address this concern by offering to give owners of Activision games the right to stream them elsewhere. It backed that up by signing 10-year deals with the likes of Nvdia Corp so rivals could provide the content. European regulators cheered this for giving consumers a cloud-gaming option unavailable today.

But the CMA reckoned this would unhelpfully tie the cloud-gaming market to one particular business model, whereby consumers bought games from one place in order to stream them elsewhere. The UK regulator anticipated a better future without the deal, one where Activision would be incentivised to make its content directly available to a host of competing cloud platforms that could then resell it however they please, including via multi-game subscription services and to non-Windows platforms.

Microsoft’s new transaction structure appears to address the CMA’s concerns head-on. It gives video-game maker Ubisoft Entertainment SA cloud distribution rights outside the European Economic Area for all of Activision’s current catalogue, plus any new content produced in the next 15 years. The French firm keeps those rights in perpetuity and can make those games available to competing cloud platforms as it pleases.

It’s a completely different transaction, with a more solid structural solution to the CMA’s worries. Will it be enough? One fresh objection would be that as we approach 2040, Ubisoft would lose rights to new Microsoft-Activision titles. So it’s not a permanent fix. But if the concern is to allow the cloud market to evolve and mature according to consumer preferences, there seems to be plenty of time and latitude for that to happen.

Might the deal with Ubisoft dampen the incentive of Microsoft to innovate in cloud gaming, given it won’t be getting 100 percent of the upside? That also seems like a weak challenge given the tech giant will still get royalties.

The tone of the CMA’s statements around the development is positive — although the body says there’s no “green light” yet. It will have to review this new deal on its own merits in line with the usual framework, with a preliminary investigation due to complete by mid-October. The next step after that is usually either outright clearance or a second look were there continued concerns. Still, if the CMA finds issues during this initial probe, merging parties do get a chance to propose remedies.

Given all that, and bearing in mind how much work has already been undertaken, the chances of this transaction getting cleared appear to have increased considerably. The complicating factor is whether a revised deal means the European Commission will want to reexamine the situation.

The CMA has taken a lot of flak for opposing a takeover based on concerns about a market that’s still so immature. But this saga could conclude with the regulator’s credibility intact — or even reinforced. The US tried and failed to block the transaction. Europe rolled over when Microsoft proposed some tweaks. By at first prohibiting the deal, the UK has now prompted Microsoft to propose an alternative that looks better for gamers.

And if the CMA can show it’s possible to be tough but pragmatic, that would be a good outcome for dealmakers and consumers alike.

Chris Hughes is a Bloomberg Opinion columnist covering deals. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg