Microsoft and Activision Blizzard won't take no for an answer | This Week in Business

The UK CMA shocked everyone this week, announcing that it was blocking Microsoft's acquisition of Activision Blizzard in the interest of protecting competition in the burgeoning cloud-gaming market.

Well, maybe not everyone. I was shocked, however, as my assessment of the deal hasn't really changed since the CMA released its first provisional ruling in February. Given that cloud gaming as a market barely exists at this point and Sony could choose to compete more aggressively there if it felt like it, I'm suprised the CMA found that to be the sticking point.

But I don't really want to talk about what this means for the deal or what happens now. You can certainly find better informed takes on that, perhaps on this very site.

What I want to talk about are the different approaches Microsoft and Activision Blizzard initially took to this setback.

QUOTE | "The CMA's decision rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom." - Microsoft vice chair and president Brad Smith in a statement released immediately after the ruling and promises to appeal.

QUOTE | "The CMA's report contradicts the ambitions of the UK to become an attractive country to build technology businesses. We will work aggressively with Microsoft to reverse this on appeal. The report's conclusions are a disservice to UK citizens, who face increasingly dire economic prospects. We will reassess our growth plans for the UK. Global innovators large and small will take note that - despite all its rhetoric - the UK is clearly closed for business." – An Activision Blizzard representative offers the publisher's own take.

In short, it's a Good Monopolist, Bad Monopolist routine. Or maybe a Bad Monopolist, Worse Monopolist routine.

Both statements contain a threat that these businesses will punish the UK by withholding business from it in the future. The difference is that while Microsoft's statement gestures vaguely in the direction of consequences to retain plausible deniability, Activision Blizzard's threat is spelled out with all the subtlety of a mobster collecting protection money.

"These sure are some increasingly dire economic prospects your peoples are facing. Would be a real shame if me and my global innovator buddies were to… [cracks knuckles menacingly] reassess our growth plans, you know?"

Microsoft has shown respect for the institutions it is dealing with, while Activision Blizzard has taken a more aggressive and irreverent approach

It's pretty much in keeping with the way Microsoft and Activision Blizzard have handled communications around the merger up until the CMA's ruling. Microsoft has generally carried itself with appropriate decorum and respect for the institutions it is dealing with, while Activision Blizzard has taken a more aggressive and irreverent approach, even dabbling in memes.

QUOTE | "It really isn't at all about Sony or Microsoft's platform, it's really about the future of technology. [UK Prime Minister] Rishi Sunak has said they'd like to be the Silicon Valley of Europe or of the continent, and if deals like this can't get through, they're not going to be Silicon Valley, they'll be Death Valley." – In February, Bobby Kotick went on CNBC to warn the UK that the tech industry has no appetite for government oversight.

It's a common refrain from companies (and people) with billions to burn, like Elon Musk threatening to relocate Tesla's headquarters because the health department wouldn't give it an exemption from lockdown restrictions in a pandemic, or pro sports teams threatening to relocate if local taxpayers don't buy them new stadiums.

Do what we want or we'll take our business elsewhere. (Or put another way, "Do what we want and nobody gets hurt.")

Sometimes the threats are idle, other times not. Sports teams have certainly relocated, and Tesla is now headquartered in Austin, Texas (though the California facility at the heart of that dispute remains operational).

Sometimes the threat doesn't even need to be voiced; it's enough for people to have seen the same situation play out enough times that they'll pre-emptively capitulate. When there were rumors years ago that the Tennessee Titans were considering relocating, ownership explicitly denied them. This week the Metro Nashville City Council approved bonds that will bring the public financing of the stadium to $1.2 billion.

Sometimes companies try to solicit carrots instead of threatening with sticks, and sometimes the governments that bend over backwards for these outfits still get nothing. Arlington, Virgina promised Amazon $573 million in tax breaks and $23 million in cash to beat out hundreds of other cities for the honor of hosting the company's HQ2 second headquarters, only to have the online giant halt construction last month with no set date to resume.

But really, what has Activision Blizzard been threatening to withhold from the UK here? Its biggest contribution to the UK gaming industry has been buying local developers like Bizarre Creations, FreeStyle Games, and Swordfish, and then shutting them down or selling them.

It clearly never even wanted Swordfish. The studio came over in the huge merger with Vivendi Games that formed Activision Blizzard, promptly dropped its 50 Cent: Blood on the Sand project from the release schedule, and then sold the studio to actually-relevant-to-the-UK-industry publisher Codemasters a few months later.

In 2012 Activision did launch a UK studio of its own in Blast Furnace, but soon lost interest and shuttered it in 2014.

To be fair, Activision Blizzard does employ some people in the UK. Looking at the company's filings with the UK government, King (filing as Midasplayer.com) employed a monthly average of 363 people during 2021, down from 403 in 2020. Activision Blizzard UK Limited employed another 154, and the company did recently establish a Sledgehammer UK studio that will need staffing up.

I don't know if having fewer than 1,000 jobs in the UK is worth looking the other way when your regulator determines a deal will have anti-competitive effects and hurt consumers though.

But what about taxes? Activision Blizzard has been hugely successful in recent years, and big profits mean a bigger take for the government, right? Not exactly.

STAT | $441 million – Activision Blizzard UK Ltd's reported pre-tax loss for 2021, which meant the company didn't pay taxes but instead received a $5.3 million tax credit for the year.

STAT | $564 million – Activision Blizzard's overall profit in 2021.

Weird, right? Activision Blizzard rakes in money hand over fist, but the UK subsidiary posts a loss resulting in a tax credit? Part of the reason this can happen is that Activision has set up a complicated web of subsidiaries that license IP rights to the rest of the company and then charge each other fees for the use of those rights.

For the company as a whole, those payments are a wash, but for the individual subsidiaries, they can effectively transfer profits from countries with higher tax rates to subsidiaries with lower tax rates, like those in Bermuda and Barbados.

STAT | $1.1 billion – The amount of back taxes and penalties tax authorities in the UK, Sweden and France were seeking from Activision Blizzard in 2019, according to investigative think tank TaxWatch UK.

To hear Activision Blizzard tell it, the UK government is anti-business and anti-tech, and this CMA ruling is the proof. But this ruling is really only against the merger of Microsoft and Activision Blizzard, a merger which doesn't seem to have a lot of upside for the tech businesses that compete with Microsoft or Activision Blizzard.

Besides, it was just last month that the UK government announced it was upgrading the UK game development tax break from 25% to 34%, which actually gets it in the neighborhood of Quebec's 37.5% tax credit for labor costs. Why does the UK hate tech so much?

By the time Microsoft's Smith appeared in a BBC Wake Up to Money interview Thursday, the tone was notably more aggressive

As for the other side of this deal, Microsoft's ultimately not that different from its dance partner. Its immediate statement released after the CMA ruling may have been the calm, measured, polite communications we had been used to seeing – Microsoft presumably prepared it and a number of other statements beforehand to have ready whichever way the ruling went – but by the time Microsoft's Smith appeared in a BBC Wake Up to Money interview Thursday, the tone was notably more aggressive.

QUOTE | "If the Government of the United Kingdom wants to bring in investment, if it wants to create jobs, and if it wants to make the United Kingdom a home where technology is not only going to flourish, but be creative… then it needs to look hard at the role of the CMA, this regulatory structure in the United Kingdom, this transaction and the message that the United Kingdom has just sent to the world." – Smith asks to speak to the CMA's manager, suggesting that legislators strip the regulator of its independence so that its decisions are more susceptible to political tampering.

And while Smith framed many of his comments as concern for how innovative start-ups will be discouraged from setting up shop in the UK, he was clear that there would be implications for Microsoft's work in the country as well.

QUOTE | "Microsoft has been in the United Kingdom for 40 years and we play a vital role, not just supporting businesses and non-profits but even defending the nation from cyber-security threats. But this decision, I have to say, is probably the darkest day in our four decades in Britain. It does more than shake our confidence in the future of the opportunity to grow a technology business in Britain than we've ever confronted before." – Smith is not saying that Microsoft would cease its work on the UK's national security efforts if the deal doesn't go through, but he's clearly not not saying it, either.

And much like Activision Blizzard, Microsoft is also taking advantage of tax havens. For the financial year ended June 30, 2022, Microsoft reported net income of £16.7 billion ($20.9 billion), while UK subsidiary Microsoft Limited posted a net loss of £12 million. ($14.5 million).

The UK subsidiary did pay taxes – about £240 million ($300 million) in taxes as a matter of fact, but £136 million ($170 million) of that was specifically back taxes paid to the UK to resolve a years-long dispute over how it was in-dealing between international subsidiaries to lower its tax bill, just like Activision Blizzard.

That's also why the Irish subsidiary of the company, Microsoft Round Island One, is actually a resident of Bermuda for tax purposes, has no employees, and reported a profit of £222 billion ($277 billion) in 2020.

Taxing authorities are aware of these shenanigans, and sometimes they do try to stop them. As ProPublica and Fortune detailed in a co-published investigation, the IRS accused Microsoft of attributing $39 billion in US profits to its Puerto Rico subsidiary as part of a tax avoidance scheme.

It was such a colossal amount of money on the line that the IRS took the unusual step of hiring a private lawfirm with a reputation for winning complex cases against giant companies to help with the audit. Microsoft objected, arguing that the external lawfirm would be focused on winning while the IRS's usual remit was to find "the right number" of taxes that should be paid. (Remember kids, it's a Good Thing for corporations to be absolutely ruthless in their pursuit of profits, while governments representing the collective interest of the people must fight with one hand behind their backs. Also, they shouldn't even think of it as a fight because everyone should have the same goal of making the corporations richer.)

This is the thing about these massive companies. What they are given is never enough, and what they give back is always too much.

Microsoft lost that objection, but around the same time, a trade group it was a part of called the Coalition for Effective and Efficient Tax Administration decided that preventing the IRS from using outside lawyers for audits was one of its priorities. CEETA lobbied for a prohibition on the practice, arguing it would hurt small businesses who could not afford to go up against $1,000-an-hour lawyers. US tax reform legislation curtailing the use of outside lawyers for IRS audits was passed in 2019.

This is the thing about these massive companies. If it ever happens that the rules don't benefit them, they work to change the rules. What they are given is never enough, and what they give back is always too much. That's sort of baked into the whole "profit-seeking business" thing in the first place.

The larger a company is, the more leverage it has to get its way. And it's going to use that leverage however it can, extracting concessions and compliance from every party within its sphere of influence – every customer, every competitor, every government – that will only make it harder for others to compete with it in the first place.

If these massive companies can use that leverage to veto and circumvent the regulatory agencies we established specifically to keep them in check, then why would we even bother pretending our elected governments are still the ones running the show?

The rest of the week in review

QUOTE | "We moved up earnings to answer questions that are already answered in the earnings materials we planned to release tomorrow." – An Activision Blizzard representative gives us a gem of a non-answer as to why it told investors it would release its financial earnings Thursday after the close of trading, but instead rushed the (very positive) numbers out Wednesday just hours after the CMA ruling came out.

And here I was thinking they were panic-reacting to the bad news and trying to bolster their share price, which dropped about 10% on the CMA news. As for how that worked out, Activision Blizzard stock was still trading down basically the same 10% on Thursday afternoon just before it would have released its earnings, which again, were very good and might have provided a nice reminder that the company's underlying business is solid instead of being lost in the immediate aftermath of the CMA ruling. Ah well.

QUOTE | "It is unlikely that the [UK's Competition Appeal Tribunal] will disagree with the CMA on all counts, but it may see things differently on certain points. I think the chances of a successful appeal based on a rejection of the CMA's findings is relatively low looking at the history of these sorts of appeals. Having said that, the CMA's more activist stance will inevitably see more decisions being appealed and we may start to get a higher volume of successful outcomes as a result. I'm expecting this process to take months." – Ampere Analysis' Piers Harding-Rolls was one of numerous analysts weighing in on the importance of the CMA's ruling in the Microsoft-Activision Blizzard deal and what happens next.

STAT | 25 million - The number of PS5 systems Sony is looking to sell in the just-started fiscal year. If it can reach that, it would be the most PlayStation consoles the company has ever sold in a single year.

QUOTE | "Cal can run along walls, except when he can't, he can defy gravity, except when he can't, he can move things with his mind, except when he can't." - In a review of Star Wars Jedi: Survivor, The Gamer's Stacey Henley critiques the game's awkard use of video game logic to control the player experience in an open-world game. Check out our Critical Consensus round-up for more of the (generally positive) reviews for Respawn's latest.

QUOTE | "These are IPs we love; we made them. And our players love those IPs. To let them wither and die because they are not part of our strategy would be a shame." – Bossa Studios CEO Henrique Olifiers explains why the company decided to sell its established franchises like Surgeon Simulator and I am Bread as it pivoted the company to focus on co-op PvE games.

QUOTE | "You worked there because you were a gamer. People boasted about epic Gamer Scores and joked about staying up multiple days straight in order to beat the latest release. The men were hardcore. The management was hardcore. The women were doubly hardcore. To succeed politically in a viciously political organization, you lived the brand." – 10 Years Ago This Month, SpryFox chief creative officer Dan Cook explains what it was like working for Microsoft in the Xbox 360 era.

QUOTE | "Through hardship, to the stars" – The official motto of NetEase's new developer Anchor Point Studios, which I hope prompts job applicants to ask a lot of very pointed questions considering the abundance of abusive studio culture and crunch culture stories we've seen in recent years.

QUOTE | "The panel affirmed except for the district court's ruling respecting attorney fees, where it reversed and remanded for further proceedings." – The US Court of Appeals for the Ninth Circuit ruled on Epic and Apple's appeals over the initial verdicts on 10 different issues in their court case, and the only thing that changed is that Epic now has to pay Apple's legal fees.

QUOTE | "Nearly a third of Sega's long-time workers still lack full-time status, paid time off, proper training, or even bereavement leave, despite dedicating years of their lives to Sega." – The union representing a group of 144 Sega of America staff in Irvine, California explains why the employees are organizing.

QUOTE | "I'm not sure where to begin, except to say, with equal parts fury and sadness, that Waypoint is over. The team, myself included, have been terminated by Vice, and our final day running the website, the podcasts, and streams, will come to an end on June 2nd." - Waypoint senior writer Patrick Klepek announces that the Vice gaming vertical will join the ranks of shuttered gaming sites that deserved far better than they got.

STAT | 119 – The number of Star Wars retail games released in the UK since the launch of X-Wing in 1993, the latest being today's Star Wars Jedi: Survivor. Of those, the highest grossing title was 2015's Star Wars: Battlefront.

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