Why the FTC Needs to Get It Right on Microsoft’s Bid for ‘Call of Duty’ and ‘World of Warcraft’ Gaming

A common critique of regulators is that they’re one step behind the businesses they regulate, but the U.S. Federal Trade Commission (FTC) has a rare and crucial opportunity to flip the script. The European Commission recently approved Microsoft’s proposed acquisition of gaming giant Activision-Blizzard, just weeks after the UK’s Competition and Markets Authority (CMA) opposed it. Now, all eyes are on the FTC, which is currently challenging the transaction, as it seeks public comment on the deal.

The issue has so far been talked about mainly as a distinction between console-based gaming (already a large market) and cloud-based gaming, a fast-growing market. But the acquisition is really about much more than Microsoft acquiring a gaming company. What’s at stake is the future of the trillion-dollar cloud computing market, and the cloud is about nothing less than who wins and loses in the next generation of the digital economy.

The FTC should recognize that the gaming markets are rapidly converging into fundamental cloud services — and take action now to address the future consequences of creating an undue advantage to a combined offering that ties together Microsoft’s Azure cloud and the Activision-Blizzard platform.

Simply put, gaming as an application is a leading window into the future of cloud computing as a whole. Gaming in the cloud drives data collection, interactivity, graphics, narrative, security, engagement, and AI — all at massive scale. What we should be talking about is the convergence of Big Tech, entertainment, video gaming, business applications, and content, not a simple add-on to Microsoft’s expansive Xbox and PC-based gaming offerings.

Companies that aim to dominate cloud computing in the next decade are going to get there, in part, by trying to dominate gaming.

If Microsoft gets a head start on the expansive demand and data flow from cloud gaming, it will advance in the closely adjacent markets that the cloud serves, including generative AI. In permitting the acquisition to proceed, the European Commission — which is simultaneously cracking down on Microsoft’s cloud licensing practices — chose to separate the cloud gaming market from the overall cloud business market. It’s a mistake the FTC should not repeat.

The extraordinary long-term opportunity in the overall cloud market explains why Microsoft has pursued Activision so aggressively, and why it is trying to keep the public and regulatory focus on the relatively narrow and short-term issues of Activision’s flagship games like “Call of Duty” and “World of Warcraft.” And it explains why regulators in the U.S., the U.K. and elsewhere should hold firm.

Typically, when a company faces competition policy challenges — as Microsoft is with the UK’s CMA — we expect a balanced tone questioning the factual and legal basis of the oversight decision. Companies will usually argue for a different definition of the relevant market, promise to seek appeal on any and all of those grounds, and look for ways to address the stated concerns of regulators. Competition policy is, after all, an interpretive negotiation between governments and big companies about what constitutes structural market power and acceptable behaviors, not a cut-and-dry matter of simple facts.

But Microsoft didn’t take that expected approach in the UK. Instead, the firm came out swinging, shedding its hard-earned “good actor” reputation that it has cultivated over the last decade with competition and antitrust regulators around the world. Company President Brad Smith — who is as much a global statesman as he is a tech executive — uncharacteristically threw out the playbook in favor of a defiant and aggressive stance: “People are shocked, people are disappointed, and people’s confidence in technology in the UK has been severely shaken.” He even went so far as to issue a thinly veiled threat, stating, “There’s a clear message here — the European Union is a more attractive place to start a business than the United Kingdom.”

Smith’s response was telling. Instead of offering concessions that would seek to satisfy the CMA’s stated preference for structural over behavioral mitigations, the company’s response made clear that the CMA is striking at the heart of Microsoft’s rationale for the deal. Gaming lives within highly dynamic markets both commercially and technologically; many in the industry believe that consoles are the past, and that cloud gaming is the future, which is why Microsoft’s failure to offer equally binding commitments in that growing part of the market stood out so vividly to the CMA.

If this fight was really just about console vs. cloud gaming as the “right” market definition for analysis, surely Microsoft would have done a better job correcting that part of the narrative with more controlled, informative communications. Angry defiance and threats aren’t the way to address a wonky issue of market definition.

Microsoft will still reject UK regulators’ core contention that its concessions — such as a 10-year agreement to guarantee the availability of important Activision games on competitors’ consoles — weren’t good enough. But the lack of trust of important regulators in the firm’s broader intentions for the market ought to be concerning to leaders in Redmond. The FTC will surely take notice that Microsoft is deploying its heft in an attempt to bully its way to approval of the Activision deal in the UK … and running a bit of a victory lap about the EC decision. If bigness is the problem, acting the bully in one venue and then celebrating a victory in another is not a long-term solution.

Bottom line: Microsoft has charted a multi-faceted course toward cloud dominance and this particular and important piece of the puzzle was shrouded as “just” a gaming acquisition. Presumably, the firm is mad that it got caught by a significant global regulatory body. That’s why Microsoft threw down the gauntlet and shed its cooperative reputation. The stakes are that high.

Competition policy authorities at the FTC and in other markets around the world should see the game — and the gaming industry — in precisely that larger frame. The FTC and other regulators should stand firm.

Steven Weber is professor of the Graduate School at UC Berkeley’s School of Information, and the founder and former director of Berkeley’s Center for Long Term Cybersecurity. He has written extensively on global technology policy and competition issues (see for example, Bloc by Bloc: How To Build a Global Enterprise for the New Regional Order ) and recently participated in a FTC panel regarding the Microsoft-Activision acquisition.