Microsoft between Chat GPT fame and Call of Duty problems

Microsoft is impressing the markets with its artificial intelligence progress, but it faces major hurdles in its gaming expansion. The Activision-Blizzard (ATVI) acquisition by Microsoft (MSFT) is receiving another blow, this time from the UK. After the FTC lawsuit, the UK competition watchdog is provisionally concluding that the deal will decrease competition and will harm the gamers through higher prices and reduced innovation. Activision shares lost 3.58% yesterday, in a market where Google (GOOG) dropped over 7% on concerns about its chatbot Bard not being accurate and unable to compete with Chat GPT. Microsoft shares, who invested 10 billion dollars in Chat GPT parent OpenAI, closed the day with a small loss.

Market commentary by eToro analyst for Romania, Bogdan Maioreanu

But the good news in the AI field for Microsoft was offset by the CMA – the UK Competition and Markets authority – investigation provisionally conclusions: Microsoft’s proposed acquisition of Activision could result in higher prices, fewer choices, or less innovation for UK gamers. As a result of the investigation the CMA is waiting for responses from the “interested parties” to address the concerns until March 1st and the final report is due on April 26, 2023.

The CMA was concerned by cloud gaming and game exclusivity. Microsoft already accounts for an estimated 60-70% of global cloud gaming services and also has other important strengths in cloud gaming from owning Xbox, the leading PC operating system (Windows) and a global cloud computing infrastructure (Azure and Xbox Cloud Gaming). CMA provisionally found that buying one of the world’s most important game publishers, Activision, would substantially reduce the competition that Microsoft would otherwise face in the cloud gaming market in the UK.

In the findings, CMA specifically mentioned Call of Duty games that were found to drive competition between consoles. If the merger reduces this level of competition, then it could eventually lead to higher prices, reduced range, lower quality, worse service, and/or reduced innovation for console gamers, whether they currently play on Xbox or PlayStation. This conclusion of the CMA comes days after the EU has issued Microsoft with a formal antitrust warning over its $69 billion bid for Activision-Blizzard.

Following the report, Microsoft believes that behavioral remedies from its part may address the CMA concerns and its commitment to grant long term 100% equal access to  Call of Duty to Sony, Nintendo, Steam and others preserves the deal’s benefits to gamers and developers and increases competition in the market.

The global games market declined 4.3% in 2022 but is still at over 184 billion dollars, according to the gaming analytics company NewZoo. Half of the industry revenue, over 92 billion dollars, is coming from the mobile games industry. Gaming consoles come second with 28% of the market followed by PC games with 21%.

If we put this in context, we understand how important the Activision acquisition is for Microsoft, not only for the very popular Call of Duty franchise but for the mobile gaming environment too, where the US tech giant has no “meaningful” presence, as it was mentioned by its CEO. Activision closed out 2022 with impressive results posting 50% earnings growth compared with 2021. The company’s net bookings also rose by 43% to 3.57 billion dollars. While Activision results were driven in Q4 by the Call of Duty Modern Warfare II game that had the highest opening-quarter sales in franchise history, Candy Crush, a mobile gaming popular franchise had a record performance with overall in-game net bookings growing 46% year-over-year. Despite regulators reviewing the deal, Activision has said they are working towards closing the acquisition by Microsoft by June 30 and will work closely with the regulators in the meantime. Activision share price reached 73 dollars, below the 95 dollars offered by Microsoft.