Are regulators game for Microsoft’s big new deal?

Here’s what you need to know this week:

• Affairs of state: Microsoft’s Activision Blizzard acquisition faces regulatory scrutiny

State-by-state:

• Google gave up on original programming
• Apple prepared to post record profits (again)
• Microsoft Word went woke
• Amazon won over locals in Darlington
• Meta fought with the UK government over encryption

Microsoft’s planned $68.7 billion acquisition of Activision Blizzard, the global gaming giant, is seriously important: not just to Microsoft and to gamers, but as a test case for how US regulators police big tech.

First, the specifics. More than 400 million active monthly players enjoy Activision franchises like Call of Duty, Candy Crush, Diablo, World of Warcraft, and Overwatch. The deal brings them under Microsoft’s banner and means that future Activision games could be XBox exclusive. 

“It’s a revolution for the gaming industry and by far the single biggest news item in the last several years”, says Serkan Toto, founder of Kantan Games. “Several of the biggest games in the world will not be multi-platform anymore, a thought that would have been inconceivable before the deal was announced.”

Here are three reasons why Microsoft is buying Activision Blizzard: 

• It bolsters its Game Pass subscription service. More than 25 million subscribers already pay $10-$15 a month to Microsoft for Game Pass, giving them access to more than 100 premium titles on multiple devices. When Satya Nadella became CEO in 2014, Microsoft owned ten gaming studios. If the Activision deal closes it will own 30. The acquisition means Game Pass could achieve its goal of becoming a “Netflix for gamers”.

• Activision’s community of gamers provides an “onramp” for Microsoft’s metaverse ambitions. Video gamers already spend hours in virtual worlds, buying virtual goods and interacting with each other’s avatars. It’s a long-term move, but Nadella is betting these gamers will become metaverse pioneers.

• Activision’s value is, relatively speaking, low. The scandal around CEO Bobby Kotick – who has long resisted pressure to resign amid incredibly serious allegations of presiding over a toxic workplace culture – has left the company worth less than it was last year. Even at $68.7 billion, Activision represents only about 3 per cent of Microsoft’s value. 

Microsoft is bracing for regulatory scrutiny over the deal: an insider tells the FT the company is “fully aware” getting the deal approved “won’t be a breeze, even if there is no obvious antitrust violation.”

There is a reason Microsoft expects antitrust scrutiny – there has been a shift in strategy from regulators.

In the past, the law examined takeovers in a pretty narrow way: would a deal lead to higher consumer prices, for instance? Now, the US Federal Trade Commission is changing its guidance to look more broadly at concerns about big tech dominance.

Lina Khan, the Federal Trade Commission chair, pointed out when she was a Yale Law Student a few years ago that traditional antitrust doctrine wasn’t set up to deal with tech states. Amazon’s dominance didn’t lead to higher prices for consumers. But – she argued – its power enabled it to leverage data and drive out competitors before they became a threat. Khan said the solution was for regulators to look beyond price and to the overall threat of a company becoming dominant within its own ecosystem. 

So there are two ways of looking at the Microsoft deal:

Just branching out. Even after the acquisition, Microsoft “will not hold a dominant position [in gaming] in the domestic market, let alone the global sector,” says Piers Harding-Rolls of Ampere Analysis. Tencent and Sony are both bigger in gaming terms – and will remain so even if the deal goes through. Under the narrower application of antitrust law, Microsoft shouldn’t have a problem. 

Or: 

World domination. Microsoft has the second highest market cap of any company in the world. Should such a giant be allowed to spread its tentacles so freely into new markets? If it continues to buy up gaming studios, further strengthening its Game Pass, are we – as Casey Newton argues – a step down the road to a world ruled by mega-platforms? As Khan told the New York Times, such “vertical” acquisitions deserve to be more closely scrutinised.

Last week Khan’s team announced a review of big mergers and acquisitions, with a focus on big tech regulation. “The top five tech firms have made hundreds of acquisitions, many of which fell beneath the radar,” she said. “What can we be learning to make sure we are identifying what types of deals may be illegal, even if they’re not mapping onto the traditional way that we might have been looking at this?” 

Rewriting merger guidelines doesn’t mean the Activision deal is dead. But as the former banking analyst Gene Munster said the acquisition does set Microsoft on a collision course with the Federal Trade Commission. 

Further reading: This FT feature summarises US attempts to tame big tech’s market power.

Six years after making plans to take on Amazon Studios and Netflix, YouTube is giving up on original programming. Despite a massive audience of 2 billion monthly users, the Google-owned video giant has struggled to become a destination for original TV shows. The one standout success is Cobra Kai, a spinoff of 1984’s hit movie The Karate Kid (and a favourite of your Tech State writer). From now on YouTube Originals will be limited to funding Black artists from a pot of $100 million. It’s a sign that many consumers go to YouTube for reasons other than watching expensively produced original content.

The prospect of an interest rate rise is having a dampening effect on share prices across the tech sector (Apple’s shares are down 8 per cent in 2022, Microsoft’s are down 12 per cent). Pandemic or no pandemic, though, people still love Apple. It reports quarterly earnings this week, alongside Microsoft and Tesla, and is expected to post a record profit of $31.6 billion on record quarterly sales of $118.75 billion. “Where are we spending our money?”, analyst Brian Belski asked by way of explanation. “Content and technology, period. Drop the mic.” 

“All the world’s a stage, and all the people merely players.” Shakespeare’s original line, as any English literature student would know, refers to men and women rather than “people”. The new version is a result of Microsoft Word’s “inclusive” spelling tool, which suggests politically correct alternatives to commonly used phrases, such as “Postal Worker Pat” for “Postman Pat”. Although such developments are easy to laugh at, the new software is potentially an effective way for corporations and individuals to address serious issues of subconscious bias at scale. It’s also the first example of Microsoft politicising its Office products, which feels like a milestone.

Darlington has been a tech hub before – in the 19th Century, as the birthplace of the first public railway. A good feature in the WSJ this week shows how the market town in the North-East of England is evolving again after the arrival of Amazon. The company has apparently won over many locals with job opportunities, high wages and private healthcare. There’s still plenty of opposition – both from independent retailers and environmental campaigners. But Amazon is growing really fast in this country – its UK revenue increased faster in 2020 than in any other market. And such growth has allowed it to employ 1,300 full time staff in Darlington alone, all on more than minimum wage. “It feels like Amazon employs half the population of Darlington now,” one local told the paper.

The battle between the UK government and Meta over the latter’s decision to encrypt its Messenger app is heating up. Rolling Stone reports that the Home Office has hired M&C Saatchi, the advertising agency, to mobilise public opinion against the idea. The agency is focusing on child-safety concerns. It’s planning to place an adult and a child in a glass box, with the adult looking “knowingly” at the child as the glass fades to black. Read more here. The campaign starts later this month. 

As well as being a tech giant in its own right, Tencent is also an aggressive investor in other tech companies around the world. In 2021 the Chinese company participated in a record 270 funding rounds, rising from 174 the prior year. But there are signs this ambition is starting to slow. The company did only a third as many China deals in Q4 as in Q1. It’s likely this slowdown is part of Tencent’s new effort to stay out of the spotlight. Several venture capitalists told the FT Tencent had asked to leave its name off press releases issued by start-ups to tout new funding rounds.

Thanks for reading,

Alexi Mostrous
@AlexiMostrous

Luke Gbedemah
@LukeGbedemah