The fight between Microsoft and the UK competition watchdog over the software giant’s pursuit of Activision Blizzard is no longer just an intellectual argument about how markets work. It’s a battle of legal firepower and tactical nous. Guess who has the upper hand.

Microsoft and Activision are appealing the Competition and Markets Authority’s conclusion that the US$69-billion deal stifles innovation and can’t be fixed with tweaks. This was predictable, given the nature of the case and the protagonists’ proclivities. Yet the CMA is surprisingly unprepared.

The regulator has tried to get appeal hearings pushed back. It claimed the playing field isn’t level. The software firms lined up seven top barristers long ago, whereas the CMA has struggled to assemble its legal team. There’s a deluge of evidence to process, and its resources are stretched.

Maybe Microsoft and Activision drained the well of leading advocates. Either way, the judge heading the tribunal threw out the CMA’s request. Indeed, he accused the CMA of failing to appreciate the overriding public interest in resolving antitrust disputes speedily. Ouch.

Legal resources matter here because the arguments are finely balanced. The market in question is cloud gaming: streaming titles like Call of Duty online rather than downloading them to a PC or games console such as Sony’s PlayStation. Any assessment of a deal’s impact requires suppositions about the future of this form of gameplay.

On paper, the CMA’s position is defensible. The agency is allowed to use discretion in reaching merger decisions. That’s like having a 10-point lead on Microsoft before entering the ring. Microsoft has to convince the tribunal that the CMA conducted its analysis in the wrong way or drew irrational conclusions from the evidence. That’s not easy.

Hardly radical

Moreover, the CMA’s fundamental concern is hardly radical. This is that Microsoft would have an incentive to limit distribution of Activision titles beyond its own cloud platform. Maintaining exclusivity would help the company attract gamers, in turn giving it an edge in securing quality content — a virtuous circle. This may not be a competitive advantage in isolation but becomes one in conjunction with Microsoft’s ownership of cloud infrastructure and the Windows operating system, the argument goes.

Microsoft questions these notions, including the idea that cloud gaming is a market distinct from console gaming (where the CMA reckons the deal wouldn’t cause harm). But the CMA is in good company. An in-depth probe by the European Commission also fretted that Microsoft could withhold Activision games from rival cloud distributors. Similar arguments underpin the US Federal Trade Commission’s litigation against the transaction.

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The thornier issue is the CMA’s refusal to accept Microsoft’s suggested fixes. The watchdog’s European peer reckons these transform the deal into something that actually benefits consumers by providing options they don’t have today: gamers who buy Activision titles would be permitted to play them on non-Microsoft cloud platforms already lined up to stream the catalogue.

The CMA acknowledges these benefits but doesn’t see them outweighing the deal’s downsides. The remedies risk standardising a cloud model whereby consumers purchase games licences and bring these to their chosen streaming service. Alternatives — say, where the streaming service buys games and rents them out — might struggle to gain traction.

It’s unfortunate that the CMA has a stated aversion to so-called behavioural remedies (effectively promises of good conduct), which are what Microsoft is offering. That risks making its objections look ideological. The stance is probably too rigid. Nevertheless, it’s more credible in deals involving markets whose future is uncertain like this.

We don’t know how the European Commission weighed the tradeoffs, as it hasn’t published its full reasoning. But as Zach Meyers of the Centre for European Reform argues, the CMA’s approach has the virtue of letting consumers decide what business models should prevail and “shows … more respect” for open markets.

The CMA is on the back foot. Comments by Microsoft and Activision casting doubt on the attractiveness of UK investment have whipped up a political storm. The chancellor of the Exchequer has told regulators to understand their responsibilities for economic growth. The pile-on continues. Chemicals billionaire Jim Ratcliffe this week said a CMA block on one of his deals showed the agency was “increasingly hostile to business”.

Read: Microsoft piles pressure on UK over blocked Activision deal

Let’s hope the case will turn on its merits and not the size of each side’s legal spending. Obviously, losing the appeal would create huge issues for the CMA. But one lesson is already clear: the regulator must ensure it is capable of defending controversial decisions. After all this, it can’t shy away from making another bold call if the next big merger case demands one. — Chris Hughes, (c) 2023 Bloomberg LP