Microsoft and Activision Blizzard have both already released statements vowing to appeal the ruling. Given the CMA decision and the US Federal Trade Commission, or FTC, hearing set for August, we are lowering our conviction that the deal will be approved to 50/50 from more likely than not. Additionally, we now project the deal closure will be pushed out to 2024, if it happens at all. We are maintaining our Activision fair value estimate of $92, which equals our standalone valuation and is near the present value of the $95 per share Microsoft has offered to pay.
Given the CMA action, Microsoft and Activision Blizzard now face three key dates over the next four months. The first is the May 22 deadline for the European Commission, or EC, the EU’s regulator, to issue its ruling. The EC is expected to approve the deal, but the CMA ruling may impact the outcome. The second date, July 18, is the deadline for closing the deal, but we expect Microsoft and Activision Blizzard to extend the deadline. Finally, the evidentiary hearing for the FTC lawsuit is set for August 2.
The primary concern for the CMA is that Microsoft is the largest player in the global cloud gaming sector and that the deal could stifle competition. While this is true, Newzoo estimates that cloud gaming revenue totaled $2.4 billion in 2022, less than 2% of the estimated $184 billion overall video game market.
While cloud gaming will grow much faster, Newzoo estimates that cloud gaming will account for less than 4% of the total market in 2025. Despite Newzoo’s projection, there are limited business models for stand-alone cloud services as the most prominent one, Google’s Stadia, shut down in January, just over two years after launch. We think that Microsoft can credibly argue that cloud gaming is and will remain a very small part of the overall gaming market over the next five years.
The CMA is also worried that the Microsoft cloud deals didn’t include potential cloud operators looking to use PC operating systems other than Windows. Additionally, the CMA concluded that Activision was likely to bring its games to cloud services. The non-Windows concern is interesting since non-Windows PC gaming has been a very small piece of the market over the last decade-plus.
The only recent success is Valve’s Steam Deck, a portable PC handheld that runs on a modified Linux OS. However, Valve has shown little interest in cloud gaming and has tied the Steam Deck to its own Steam PC store, a relatively anti-competitive behavior. For its part, Activision Blizzard has shown little interest in putting its games on cloud services and doesn’t sell its biggest PC games from Blizzard on any other PC game store other than its own Battle.net storefront.
