The U.K. Competition and Markets Authority (CMA) blocked Microsoft's (NASDAQ: MSFT) $68.7 billion acquisition of video game developer Activision Blizzard (NASDAQ: ATVI) this week, pressuring the performance of video game sector exchange-traded funds.
The Global X Video Games & Esports ETF (NASDAQ: HERO) and the VanEck Video Gaming & eSports ETF (NASDAQ: ESPO) fell lower on the news Wednesday after Activision Blizzard shares fell as much as 11% on the news. However, ESPO is still outperforming the broader market with a year-to-date gain of 17%, while HERO is only slightly underperform with a gain of 6%; the S&P 500 (NYSE: SPY) is currently up 9% for the year so far.
The CMA said Wednesday in its decision that the deal poses competition concerns in the cloud gaming market, as Microsoft could make Activision's games exclusive to its cloud gaming platform Xbox Game Pass, cutting off distribution to other companies in the emerging industry.
"Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities," the CMA said in a press release.
The regulator noted that Microsoft already has a strong advantage in the market as it owns the leading PC operating system Windows which most PC games are developed with, as well as its dominant Xbox platform and a portfolio of industry leading games outside of the titles it would acquire under the deal. The regulator said the tech giant already accounts for an estimated 60-70% of global cloud game services.
"If Microsoft were to buy Activision, that position would only become stronger, reducing competition in cloud gaming, and affecting how the market develops. The evidence available to the CMA showed that Microsoft would find it commercially beneficial to make Activision's games exclusive to its own cloud gaming service, making it harder for other platforms to compete," the CMA said.
Microsoft has already offer the CMA remedies in an attempt to resolve the regulator's antitrust concerns, including giving the regulator the power to govern what games Microsoft must make available on multiple platforms and under what conditions over a ten-year period. However, the CMA was still concerned about Microsoft's potential market dominance even with these proposed concessions.
"Given the remedy applies only to a defined set of Activision games, which can be streamed only in a defined set of cloud gaming services, provided they are purchased in a defined set of online stores, there are significant risks of disagreement and conflict between Microsoft and cloud gaming service providers, particularly over a ten-year period in a rapidly changing market," the CMA said.
The two companies have since stated that they plan to appeal the CMA's decision.
"We have already signed contracts to make Activision Blizzard's popular games available on 150 million more devices, and we remain committed to reinforcing these agreements through regulatory remedies. We're especially disappointed that after lengthy deliberations, this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works," the companies said in an issued joint statement, outlining the reasons behind the planned appeal.