[Nardeep is a student at Maharashtra National Law University, Mumbai.]
In January 2022, Microsoft announced the acquisition of Activision Blizzard, which is termed the biggest tech deal in history. The deal is reportedly worth around USD 69 billion, which makes it a record deal. It is termed a smart acquisition by Microsoft because of its growing footprint in the cloud gaming industry, where all the games are supposed to be compatible with different platforms or consoles and inter-console gaming is possible. One prominent example is the case of EFootball by Konami, which can be played across platforms.
Microsoft’s Xbox is a direct competitor of Sony’s PlayStation, but as a console, Microsoft’s Xbox has been losing the competitive edge, and hence, the acquisition of Activision Blizzard, a game development company that owns the intellectual property rights to popular games such as Call of Duty (COD), Candy Crush, etc., makes sense from a business perspective. While the deal was supposed to be closed before 18 July 2023, it could be finalized only in the last week of October due to the expected regulatory concerns and heavy scrutiny from antitrust watchdogs around the world.
This article analyzes the deal from the perspective of new amendments to the Competition Act 2002 (Act) which introduces a new threshold called ‘deal value threshold’ (DVT) and will determine whether this transaction would have been notifiable due to this new threshold.
Regulatory Hurdles in the UK and the US
Many antitrust regulators around the world opened their investigations into the proposed acquisition of Activision Blizzard by the tech giant. In the United States, the Federal Trade Commission (FTC) investigated the acquisition rather than the Department of Justice, as the Commission had been more concerned about big tech’s dominance over the last decade. It formally stated that it would block the deal as proposed on 8 December 2022. The primary concern of the FTC was that Microsoft would exclusively sell COD, which is a hugely popular game on Xbox, and that is why Sony had also protested the deal. But after the inquiry was opened, Microsoft signed a 10-year deal with Sony that ensured that COD would be made available on the PlayStation as well. Later, a judge heard a motion for a temporary restraining order in June 2023, in which the CEO of Microsoft, took the witness stand and said that his personal goal is to get Activision’s games on as many platforms as possible. In July 2023, the preliminary injunction was rejected.
In the United Kingdom, Microsoft is still facing regulatory heat from the Competitions and Market Authority (CMA). CMA, the antitrust regulator in the UK, launched a review of the acquisition back in August 2022, and after the phase one ruling, which was issued in September 2022, it was concluded that the merger may result in a substantial reduction of competition within a market or markets in the United Kingdom. Further, the preliminary findings of the phase two review, which was reported in February, revealed that the acquisition could result in higher prices, fewer choices, and less innovation in the UK gaming industry.
CMA formally ruled against the merger in April 2023, citing multiple reasons, but the main concern was Microsoft’s dominant position in the cloud gaming market and its potential increase after the merger. However, the latest update in this inquiry suggests that CMA is likely to approve the acquisition as the Microsoft post-deal proposed a new structure that would see Microsoft selling exclusive cloud streaming rights of all games developed by Activision Blizzard, including COD, to Ubisoft for the next 15 years. To address concerns raised by the CMA and obtain their approval, Microsoft conducted the restructuring. Since then, it was reported that CMA will be granting their approval soon, and the revised deadline to close the deal was set to 18 October 2023.
Indian Outlook Considering 2023 Amendment to Competition Act 2002
In April 2023, the Competition Act 2002, was amended to include DVT for notification of M&A deals under Section 5 of the Act. It applies when the target company has significant business operations in India and the transaction value exceeds the threshold. Before the Act was amended, the thresholds for triggering the Act's requirements only applied when the target company had significant assets or turnover in India. While the Act and the relevant section were amended back in April, CCI still needs to implement this threshold by notifying regulations that define the term ‘significant business operations’, which the amendment statute left on CCI to define.
Microsoft had applied to over 37 competition authorities in different countries for the approval of the acquisition of Activision Blizzard, including Ukraine, Saudi Arabia, Brazil, South Korea, etc. Microsoft did not seek CCI approval because, prior to the amendments in the Act, and currently, it is unnecessary. This is because the CCI has only introduced draft regulations for combination notices.
CCI is in the process of implementing the regulations which were recently closed for stakeholder comments. The key question is whether Microsoft needs to obtain CCI approval if these amendments are notified before their deal concludes. If Microsoft does require CCI's approval, how will CCI handle the acquisition?
First, to find out whether it will be notifiable post notification of amendment, the threshold given under DVT must be met, which according to the draft regulations is INR 2,000 crores. This threshold is applied to the value of the deal or the transaction, which according to the reports is USD 69 billion. Therefore, DVT can be triggered depending on whether the target company has ‘substantial business operations’ in the country. The target company meets the criteria for 'substantial business operations' under the draft regulations if, before that date, it has 10% or more of its total global users, subscribers, customers, or visitors in India, along with gross merchandise value and turnover.
A Sensor Tower article reported that COD Mobile, a popular game from Activision Blizzard, had 16.2 million downloads in India, accounting for approximately 11% of total downloads. In India, 93.8% of gamers prefer games like Candy Crush, which Activision acquired in 2016. India ranks second globally in terms of active Candy Crush users, with 3.69 million players. However, it is still not clear whether the number of users of all the games developed by Activision Blizzard crosses the threshold of 10% or more than that out of its total users worldwide, and if it does, then the transaction becomes notifiable since the DVT will be triggered.
Now, let us answer the second question as to how CCI will deal with the notification of the deal. Most likely, if the deal is notified, the CCI will investigate the acquisition due to the sheer size of the deal and the growing footprint of tech giants in M&A. It was done in the merger of Air India and Vistara and the primary reason why this threshold was introduced was to bring these global M&A deals under its ambit. Some of the factors that will concern CCI in its investigation will be the exclusive availability of Activision’s games on Microsoft’s Xbox, and another main concern will be the dominance of Microsoft in cloud streaming and gaming services, with Microsoft’s Azure being a prominent player in the cloud market. These concerns were raised by both FTC and CMA.
It would have been very interesting to see how the antitrust watchdog would have dealt with the acquisition of Activision, whether it would have taken a soft stance such as the courts in the United States or a stronger stance such as CMA in the UK, which ultimately forced Microsoft to restructure the whole deal and involve a third party in the picture. However, history has shown that CCI has relied on the EU and UK’s decisions and followed a similar approach when it comes to implementing antitrust law in India just as the CCI’s decision in Indian National Shipowner’s Association v. Oil and Natural Gas Corporation Limited. In fact, the Competition Law Review Committee was inspired to introduce this threshold from Germany and Austria’s introduction of transaction value thresholds. While it is no doubt that CCI has extraterritorial jurisdiction when a deal has appreciable adverse effect on competition, unnecessarily investigating deals which do not have the potential to harm the competition in India is not desirable because of various reasons such as lack of manpower of CCI, impact on ease of doing business in the country and inward investment. However, a deal of this magnitude should be investigated rather than avoiding it due to criticisms of over regulation. It is reported that the deal has been closed and, therefore, unfortunately, we will never know how the DVT and the criterion of ‘substantial business operations' could have been applied in the biggest tech acquisition in the world.