Microsoft’s Activision deal is on life support because cloud gaming still sucks

I am not a merger apologist. I generally don’t think the world’s better off with an ever-smaller number of companies at the helm! But of all the reasons to block Microsoft’s $68.7 billion purchase of Activision Blizzard, I never dreamed that “We need to stop Microsoft from dominating cloud gaming” would be the one.

Yet that’s exactly the door regulators chose to walk through on Wednesday, when the UK’s Competition and Markets Authority ruled that the deal could “alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for UK gamers over the years to come.” They’re denying a deal that was widely expected to be approved, leaving Microsoft and Activision Blizzard hanging their hopes on a European Union decision next month.

I’ve read through hundreds of pages of documents, and most of the CMA’s argument boils down to: Microsoft is so dominant in cloud gaming today that it could control its entire future.

And I can’t help but laugh because it means the deal might die, not because cloud gaming is thriving, but because cloud gaming still kind of sucks! Microsoft is being punished because Google Stadia utterly failed, because Amazon Luna went nowhere fast, because Sony got distracted, because Nvidia can’t stream your own purchased games to you without negotiating with every publisher and developer under the sun.

It might die because EA and Verizon and AT&T mostly backed away after they realized the infrastructure costs to do it right didn’t justify weak demand from gamers and that — 5G or no — a phone is not a great substitute for a game console. It might die because Apple was so deathly afraid of becoming a dumb pipe for cloud games that it arbitrarily made up new App Store rules that lock down the iPhone.

With so little real competition, Microsoft’s xCloud looks dominant, particularly when you consider that Microsoft lumps it in with every Xbox Game Pass Ultimate subscription — whose subscribers may, for all we know, try xCloud once and never again. (We’ve asked Microsoft to clarify the monthly active user figures it provided to the CMA, which aren’t clear about that.)

Microsoft is a big fish in a tiny pond. And paradoxically, the UK’s decision might help keep it that way.

The Activision Blizzard deal could have been the biggest shot in the arm for cloud gaming ever because Microsoft promised to sweeten the pot with huge concessions to other players in the market. Did you know Microsoft promised to put every one of its PC games on every eligible cloud service on their release day for 10 years if the deal went through? Nintendo could have theoretically set up its own servers to get Call of Duty running on Switch with Microsoft’s blessing. Smaller cloud gaming providers would have had access too.

Did you know Microsoft had promised to shake up the whole business model, giving every game owner the rights to stream their own games to their own devices from the service of their choice, instead of that status quo where Nvidia has to get rights to the games you already own before it can stream them to you? That was a 10-year promise, too:

Microsoft will unilaterally grant a license to any consumer who has purchased or obtained a free license to play a PC Game from an authorized third-party PC digital storefront (“Eligible Game”) to stream the game using a generally-recognised PC consumer cloud gaming provider to a device they own (the “Consumer License”). Microsoft will grant the Consumer License by publishing it on Microsoft’s website. The Consumer License will be granted for the Term.

Nvidia’s GeForce Now boss told me that 10-year promise could break the chicken-and-egg cycle by providing enough games to attract enough gamers to convince publishers to provide more games to cloud gaming services, too. “This period is sufficiently long for cloud gaming to establish itself as a consumer service and for providers to secure a range of popular games,” Microsoft argued.

Mind you, Microsoft’s promises are pretty self-serving because they feed right back into Microsoft’s core business. If you want to stream Microsoft’s cloud PC games, you’d likely wind up investing in Windows-based servers and possibly even Microsoft’s Azure cloud platform to handle the load, like Sony was exploring for a bit. You might also halt any plans to build cloud games for Linux instead. Microsoft was apparently planning to keep all the revenue from game sales and in-app purchases instead of sharing them with rival cloud providers, too.

And the CMA makes some very good points about barriers to entry. There are precious few companies with the technology and know-how to power cloud gaming, Microsoft is one of the biggest, and it’s the only one with a computer platform that game developers actually target en masse. (Google reportedly paid developers tens of millions of dollars per game to port to Stadia’s Linux instead of Microsoft’s Windows, to give you a sense of the uphill battle.)

For new entrants without an existing gaming console (including its games and operating system), we have found that this catalogue is most likely to come from games that are currently available on PC OS, as these can be streamed from any cloud gaming service that runs that OS (provided that adequate licensing arrangements are in place). As such, these cloud gaming service providers will either need a license for a proprietary PC OS—such as for Windows, the OS for which most PC games are designed.

It might be hard for a Sony to compete with Microsoft in this realm — even though it’s Sony, not Microsoft, that purchased the IP from OnLive and Gaikai, putting two cloud gaming pioneers’ patent collections under one roof.

The CMA says it believes that Call of Duty “could make a material difference to the success of a cloud gaming provider” and that Overwatch and World of Warcraft could help, but that’s why it’s blocking the deal rather than letting it go through.

But if Microsoft was able to show that cloud gaming is actually a good business by offering a big enough collection of games to attract and retain gamers, it would be a first — and that might finally spur the investment that the technology deserves.

Still, it’s never a great idea to take a company’s merger promises at face value. One of the biggest reasons the CMA is blocking the deal is because it doesn’t think it can hold Microsoft to its word:

The complexity of the remedy, in the context of a dynamic market that is evolving, also meant that it had a high risk of circumvention, and that it would have been difficult to monitor effectively. In light of these shortcomings, we could not be sufficiently confident that the Microsoft Cloud Remedy would have addressed our concerns, and we found that the only effective remedy to the SLC is to prohibit the Merger.

And I agree that it would be all too easy for Microsoft to subtly poison its promise if it wanted.

Microsoft wouldn’t need to do something as dramatic as make Call of Duty exclusive to its own cloud gaming service, as the CMA says it fears. There are plenty of technological trip-ups just waiting to happen.

Cloud gaming does work and can work brilliantly, giving you an experience approaching that of a high-end gaming PC when everything lines up. But it depends on so, so very many things to work that way — not just your internet speed but the Wi-Fi congestion in your neighborhood, the physical distance of a company’s cloud gaming servers from your home, the peering arrangements and handshakes that take the bits all the way across the internet and deliver an image back to your screen, the virtualization of the game controller you use, and so on.

I’ve been covering cloud gaming for over a decade, since the days of OnLive and Gaikai, and I now tell everyone that the cloud gaming market won’t take off until the friction disappears. But that also means there are a lot of places Microsoft could insert friction, or fail to reduce friction, for cloud gaming competitors over the next 10 years. Even if Microsoft doesn’t intentionally sabotage rival services, there are ways it could accidentally screw things up for those who wind up depending on its platforms.

There are other technological issues still standing in the way of a vibrant cloud gaming market, not least of which is how most big games require companies to have an entire graphics card waiting in a server room for every single player. Sony — which once kept a PlayStation 3 in a server room for each cloud player — is among those searching for a way to fix that. Now, I wonder if Sony will bother now that Microsoft is simultaneously looking like less of an opportunity and slightly less of a competitor.