Activision’s Contract With Microsoft Is On Life Support Since Cloud Gaming Is Still Terrible

I am not a merger advocate. I don’t think it’s better for the world in general for fewer and fewer companies to be in charge. But I never thought that “we need to stop Microsoft from dominating cloud gaming” would be the reason to stop Microsoft from buying Activision Blizzard for $68.7 billion. Yet officials chose to go through that door on Wednesday, when the UK’s Competition and Markets Authority said that the deal could “change the future of the fast-growing cloud gaming market, leading to less innovation and less choice for UK gamers in the years to come.”

They turned down a deal that most people thought would be okay, so Microsoft and Activision Blizzard are now waiting for a decision from the European Union next month. I’ve read hundreds of pages of papers, and most of the CMA’s case boils down to this: Microsoft is so dominant in cloud gaming right now that it could control the whole industry’s future.

It might die because EA, Verizon, and AT&T have mostly stopped working on it after realizing that gamers don’t want it and that, 5G or not, a phone is not a good replacement for a game system. It might die because Apple was so afraid of becoming a dumb pipe for cloud games that it made up new rules for the App Store that make the iPhone harder to use.

With so few real competitors, Microsoft’s xCloud seems to be the best. This is especially true when you consider that Microsoft includes it with every Xbox Game Pass Ultimate contract, even though its users may only try it once and never use it again. (We’ve asked Microsoft to explain the unclear monthly active user numbers it gave to the CMA.) The deal between Activision Blizzard and Microsoft could have been the biggest boost to cloud gaming ever.

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This is because Microsoft offered to make huge concessions to other players in the market to make the deal more appealing. Did you know that if the deal went through, Microsoft promised to put all of its PC games on all qualified cloud services on the day they came out for the next 10 years? With Microsoft’s permission, Nintendo could have set up its own systems to make Call of Duty work on Switch. Smaller providers of cloud games would have been able to use it.

Here is a tweet related to this topic: 

Did you know that Microsoft had promised to change the way business is done by giving every game owner the right to stream their own games to their own devices from the service of their choice? Right now, Nvidia has to buy the rights to the games you already own before it can stream them to you. That was another promise for 10 years:

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.

The head of Nvidia’s GeForce Now told me that the 10-year promise could break the chicken-and-egg cycle by giving cloud gaming services enough games to attract enough players to get developers to give cloud gaming services more games, too. Microsoft said, “This period is long enough for cloud gaming to become a consumer service and for providers to get a wide range of popular games.”

Mind you, Microsoft’s claims are pretty self-serving because they support Microsoft’s main business. If you want to stream Microsoft’s cloud PC games, you’d probably have to buy Windows-based computers and maybe even Microsoft’s Azure cloud platform to handle the load, as Sony did for a while. You could also stop any plans you had to make cloud games for Linux.

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Microsoft was rumored to want to keep all of the money from selling games and in-app payments instead of splitting them with other cloud service providers. And the CMA makes some very good points about entry hurdles. Microsoft is one of the biggest companies with the technology and know-how to run cloud gaming, and it’s the only one with a computer platform that game makers actually build games for in large numbers. (Google allegedly paid developers tens of millions of dollars per game to port to Stadia’s Linux instead of Microsoft’s Windows.)

The CMA is this:

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 Sony to compete with Microsoft in this area, even though it was Sony, not Microsoft, that bought the IP from OnLive and Gaikai, bringing together the patent collections of two companies that were early leaders in cloud gaming.

The CMA says that it thinks Call of Duty “could make a material difference to the success of a cloud gaming provider” and that Overwatch and World of Warcraft could also help. This is why it is blocking the deal instead of letting it go through. Still, it’s never a good idea to believe what a company says about merging. One of the main reasons the CMA is stopping the deal is that 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 Microsoft could easily poison its word in a subtle way if it wanted to. The CMA says it doesn’t think Microsoft would have to do something as drastic as making Call of Duty only available on its own cloud game service. There are lots of problems waiting to happen with technology.

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Cloud gaming does work and can work very well, offering you a similar experience to a high-end gaming PC when everything goes right. But that depends on so, so, so many things, not just your internet speed, but also the Wi-Fi congestion in your neighborhood, the distance of a company’s cloud gaming servers from your home, the peering arrangements and handshakes that send bits all the way across the internet and send an image back to your screen, the virtualization of the game controller you use, and so on.

I’ve been writing about cloud gaming for more than a decade, since the days of OnLive and Gaikai. Now, I tell everyone that the cloud gaming market won’t take off until the noise goes away. But that also means there are a lot of places where Microsoft could make cloud game competitors’ lives harder over the next 10 years, or fail to do so.

Even if Microsoft doesn’t try to mess up rival services on purpose, there are still ways it could mess things up for people who depend on its platforms. There are still some technical problems that keep a thriving cloud gaming market from happening, like the fact that most big games require companies to have a whole graphics card ready in a server room for each player. Sony, which used to keep a PlayStation 3 in a computer room for each cloud player, is one of the companies looking for a solution. Now that Microsoft looks like less of an opportunity and a little less of a competitor, I wonder if Sony will even try.

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