Every cloud has a silver lining: How regulatory scrutiny of Microsoft's Activision acquisition might benefit cloud gaming

Cloud gaming is at the heart of the regulatory scrutiny facing 微软 's proposed acquisition of Activision Blizzard . But what is the current state of cloud gaming and how will it evolve? Is cloud streaming poised to disrupt video games the same way it has video and music? By pushing Microsoft to make concessions, regulators might just give cloud gaming a much needed boost.

Last week, the Competition and Markets Authority concluded that in its current form, the proposed acquisition must be blocked. The agency views cloud gaming as a “nascent, dynamic, and rapidly growing market” in which Microsoft already holds a strong position. Moreover, it deems the licensing agreements that Microsoft struck with cloud gaming services such as 英伟达 's GeForce Now, Boosteroid Cloud Gaming , and Ubitus K.K. insufficient as a remedy. Key to the regulator’s objections is Microsoft’s supposed ability to pick winners and losers and shape the evolution of the nascent segment through these agreements. The regulator based its decision on the “expectation that the market for cloud gaming services would continue to grow and become profitable in the next five years.”

It’s not guaranteed, however, that cloud gaming will follow the same trajectory as video and music . For one, the technological requirements are way more complex and demanding. As I note in a recent Bloomberg article by Cecilia D'Anastasio “Cloud streaming video games is computationally demanding. Unlike in video and music streaming, the signal goes both ways in video games: The player pushes a button on the controller, sends a signal to the server, the server computes, and then sends a signal back.” This requires more servers, located at close proximity to the player. We’ve all experienced the annoyance of a Netflix video stuttering or having to watch it in a low resolution because of issues with our Internet connection. Now imagine the same scenario when playing a fast-twitched video game like Call of Duty!

There also are issues with the business model. Major publishers including Activision have been reluctant to release their latest and best games on cloud streaming services. They can generate more revenues by selling copies directly to consumers rather than having a streaming service pay for the right to stream their content. An alternative model is having the service pay a wholesale price that becomes payable once the player passes a certain threshold in terms of time spent on a game. This model is mostly cost-prohibitive from the services' perspective. At present, the dominant model ('Bring Your Own Game') is one where a player who already owns a game on a traditional platform (e.g., Steam, Xbox) pays a fee for the right to stream the same game on a streaming service.

It is no surprise perhaps that cloud streaming so far has remained a small portion of the industry. In its decision to clear the acquisition, the European Commission noted that “cloud game streaming still represents a very limited part of the overall market for the distribution of games today, accounting only for around 1% of the total worldwide market in 2022.” And this isn’t because companies aren’t trying. The first cloud gaming services were launched in 2003. Since then there have been several well-resourced companies, many with good intentions, that have tried and failed to launch services focused on streaming. The most notable example is Google Stadia , which launched to much fanfare in 2019 only to be shut down due to a lack of consumer interest earlier this year.

Microsoft and Activision seem convinced that the future of gaming isn’t in streaming console and PC video games. Activision’s CEO Bobby Kotick referred to cloud streaming as an “inconsequent part of the business .” In its drive to get the merger approved, Microsoft offered free licenses for Activision games to several cloud streaming services and their European customers. Last week, when the CMA made it clear it wasn’t going to budge, Microsoft went one step further and proposed to sell to 育碧 the global cloud streaming rights for all current and future Activision games released over the next 15 years. Ubisoft is a logical choice—it has skin in the game: The French publisher has a long history of supporting new platforms and developing games based on novel technologies. It also already offers a cloud streaming service through its Ubisoft+ platform.

This begs the question whether the CMA is right in its assessment? Ironically, by placing so much emphasis on cloud gaming, regulators might actually give the nascent segment a boost. Never before have Activision’s internally developed games been released on cloud streaming services and several services have been offered the deal of a lifetime. Microsoft’s commitments are legitimizing a segment in need of legitimation. As D’Anastasio notes : “A lot of people in the gaming world seem to agree that cloud gaming is a marginal business — except UK antitrust regulators and the providers themselves.” Let’s hope the CMA’s efforts aren’t in vain and that it will soon arrive at the same conclusion as it evaluates Microsoft’s final push to get the acquisition over the line.

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