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27 novembre 2023

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Auteurs

Richard Faichney

Senior counsel

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Oz Watson

Collaborateur senior

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Laura Craig

Collaborateur

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Debbie Heywood

Senior Counsel – Knowledge

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Auteurs

Richard Faichney

Senior counsel

Read More

Oz Watson

Collaborateur senior

Read More

Laura Craig

Collaborateur

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Debbie Heywood

Senior Counsel – Knowledge

Read More

Microsoft completes £56bn acquisition of Activision Blizzard

Richard Faichney

Following CMA approval, Microsoft has finally completed its acquisition of Activision Blizzard.  CMA approval was the final piece of the puzzle following approval of the deal by the EC, and an initial victory for Microsoft against the US Federal Trade Commission. The FTC continues to challenge the deal in the US courts, however, this is not expected to be successful. 

The CMA secured a number of concessions from Microsoft to address its concerns. Its challenge initially focused on the concern that Microsoft would make Activision games (especially Call of Duty) exclusive to Xbox. Ultimately, this challenge was dropped as the data suggested it would be so financially adverse as to be a strong disincentive. Microsoft also signed 10-year deals with Nintendo, Sony, and many others to keep Activision games on those platforms for the foreseeable future.

The second big concern for the CMA was cloud gaming. This is currently a tiny part of the gaming industry but has been growing fast. There are differing views on how impactful this emerging sector will be for the games industry. However, cloud streaming has profoundly impacted music and TV/film, and there is some expectation that it could have a similarly significant effect on the games market with Microsoft already well-positioned to capitalise.

While blocking the deal outright at first, the CMA ultimately allowed it to go ahead after Microsoft made significant concessions to address the cloud gaming concern. Many have framed this as an embarrassing climbdown for the CMA but the CMA sees itself as the only regulator in the world to extract real concessions to address its concerns in an emerging, unproven, but potentially significant part of the games industry. 

The process has certainly been messy and massively delayed. However, the result appears net-positive. The deal has been extensively reviewed, and the aspects that have not raised concerns have been allowed to proceed. The cloud gaming aspects that raised concerns for some regulators have been addressed by a creative and relatively unprecedented solution - Microsoft granting Ubisoft an exclusive 15-year licence to cloud streaming rights for Activision’s past and future catalogue.

The Microsoft /Activision saga shows that no company is too big to fail in getting an M&A clearance and that regulators are willing to flex their muscles, even for the harder-to-win challenges and against the most prominent players in the game. As consolidation looks set to continue in a gaming industry dominated by Big Tech conglomerates, we're not expecting regulatory scrutiny of deals to ease soon.  It's clear though that creating innovative solutions to any issues raised by regulators can significantly speed up deals which do attract their attention.

For a fuller analysis of the deal and what it showed about the regulation of gaming M&A see our contribution to InvestGame's article published earlier this year.

Netflix expands cloud gaming offering

Laura Craig

On 14 August 2023, Mike Verdu (the VP of Games at Netflix) announced that a limited beta test would be rolled out to Canadian and British users for gaming on TVs, PCs, and Mac devices with US tests following in October. Mac and PC users can utilise a keyboard and mouse to play, whereas TV users are able to use mobile phones as controllers.

This transformative approach reflects broader trends towards a more convenient and scalable gaming ecosystem. In particular, handheld gaming capabilities are becoming more robust and can cope with increasingly demanding games, with the popularity of the Nintendo Switch and Steam Deck highlighting an increasing demand for gaming on the go.

While Netflix currently boasts a modest gaming catalogue, recent developments suggest a significant investment in its gaming offering. This includes the strategic hiring of Joseph Staten, former creative head of Halo Infinite, as creative lead in the development of a new Triple A game. Netflix appears to be pursuing cloud gaming as a 'value add', potentially able to reach a wide audience of casual gamers who might not otherwise subscribe to dedicated cloud gaming services. By focusing on cloud gaming alongside traditional TV and film streaming, Netflix could stand out in a competitive streaming market. Indeed, Netflix looks set to exploit its position as a critical figure in modern entertainment by tying in TV and cloud gaming, currently developing  a Netflix Assassin's Creed game with Ubisoft, in conjunction with a new live-action Assassin's Creed TV series.

Game subscriptions facing regulatory hurdle

Oz Watson

A recent joint report by data.ai and IDC suggests the decline in mobile gaming spend may be bottoming out, indicating a new period of growth. The report anticipates that 2023 is showing signs of improvement, even if the current total spending is slightly lower than the previous year. The games market is expected to increase 4% year-on-year to USD 40 billion in 2023 (access the report here).

Two key points are highlighted by the report:

  • According to the IDC, there is a significant preference among mobile app and game users (by a 3:1 margin) to see ads in exchange for free content and services, rather than paying for apps and avoiding all ads. This suggests that consumers are more inclined towards ad-supported models that allow them to access content without direct monetary transactions, indicating that ad-supported games (particularly on mobile) will continue to be a growth sector.
  • Current trends show that subscription-based game revenues will lead consumer spending in the sector this year.

Subscription models face a new challenge though with the Digital Markets, Competition and Consumer Bill (read more here) that is currently making its way through Parliament. The Bill proposes a significant overhaul of how subscription-based models work. In particular, providers will need to supply:

  • new information provision requirements on sign up
  • new and regular reminder notices throughout the subscription term
  • mandatory 14 day cooling-off periods
  • enhanced cancellation rights – including making cancellation possible via a "single communication" and "by any means".

These new hurdles to sign up and enhanced cancellation rights for consumers represent a significant challenge to games providers' revenue. Those using a subscription model will need to start adjusting their practices in readiness for when the DMCC Bill comes into force (likely in mid-2024). The culmination of these changes could drive a shift towards more ad-supported games or a slow-down in subscription revenue.

Unity Technologies responds to backlash

Laura Craig

In September 2023, Unity Technologies stirred significant controversy when it announced plans to charge developers a fee for each installation of games which use the Unity engine. It proposed introducing a 'Runtime Fee' of USD 0.20 per installation from January 2024, kicking in at 1,000,000 US Dollars of game revenue over 12 months and 1,000,000 total installations for Unity Pro and Enterprise licence users. The move faced considerable backlash from the industry, with some developers threatening to leave the Unity engine and remove their games from sale.

Unity and Unreal are currently the two most widely used game development engines. Because the engine serves as the 'framework' that a game is built around, it can be extremely challenging to change engine during the development or after the release of a game without effectively starting from scratch due to the need to redesign assets, tweak in-game physics and rewrite significant amounts of code. This poses challenges for developers who may feel the need to move away from Unity due to the introduction of the Runtime Fee. As a result of customer concerns and pushback from the industry, Unity has since attempted to reassure its users by clarifying that the Runtime Fee would not apply to users on Personal or Plus plans and it would only apply to games released in 2024 or later. Despite these clarifications, Unity continued to face widespread condemnation from publishers, developers and gamers. In the months following the announcements, Unity's CEO John Riccitiello stepped down and sentiment towards Unity overall remains mixed.

Unity's move resulted in regulatory scrutiny around potential abuse of a dominant position (as discussed here), another trend we're seeing with focus on potential competition issues in the games sector as discussed above in relation to the recent Microsoft and Activision merger.

UK's Online Safety Act now in force

Debbie Heywood

The Online Safety Act came into force on 26 October 2023 (although much of it will be brought in by secondary legislation). It focuses on online user-generated content (subject to limited exceptions) and applies to user-to-user services and search services as well as pornographic content services. The OSA regulates illegal content and certain specified types of harmful content, focusing especially on content harmful to children on services likely to be accessed by them. Terrorism and Child Sexual Exploitation and Abuse (CSEA) content are a particular focus, but a range of harmful content is also covered in specified circumstances. In relation to the most harmful type of content likely to be accessed by children, age verification/estimation must be used (subject to a limited exception). Read an overview here.

The OSA is very wide-ranging and Ofcom estimates that around 100,000 online services could be in scope.  Offline games will not be impacted, but in Volume 1 of its draft consultation on protecting people online form illegal harm, Ofcom highlights that some games allow user interaction by creating or manipulating avatars, objects and the environment themselves, and/or by using chat functionality.

By way of example, games with the following functionalities are likely to be in scope:

  • Text or voice chat functionality (team chat in team-based games such as Counter Strike, or chat in large open servers which bring player avatars together such as Fortnite).  There is an exemption for services that only enable user-generated content in the form of SMS, email or MMS messages and/or one-to-one live aural communications.
  • Games built around the generation and sharing of user-generated content (like Minecraft).
  • Virtual reality/metaverse functionality in communal online spaces.
  • Games with built-in livestreaming functionality, forums, marketplaces or other platforms which facilitate user-to-user interactions.

There is a further exemption for 'below the line' or limited functionality services which only allow user-generated content in the form of posting/sharing comments or reviews relating to content published by or on behalf of the service providers, or applying emojis and similar expressions of opinion.

While many of the safety measures will only apply to the larger and higher-risk services, all in-scope services, even the smaller, lower-risk ones, will have a range of obligations, including risk assessment and mitigation, report and complaints and record-keeping. Most businesses will also need to make changes to their terms of service. Ofcom has published its consultation on protecting people from illegal content online, and  an overview and quick guides for online services setting out ‘what you need to know’  to help them understand the first steps, with further consultations to follow.

Understanding whether and to what extent you are in scope, assessing risk to users and putting in mitigation measures together with processes to comply with safety duties will be crucial. This is not least because of Ofcom's extensive enforcement powers.  In-scope service providers have some time to prepare for full compliance but should be assessing what they will need to do. It's also worth remembering that the UK is not the only country attempting to regulate the online environment. The EU's Digital Services Act (DSA), for example, covers similar but different ground. Games businesses impacted by both sets of legislation will face a particularly complex set of compliance challenges.

For more on what is covered by the OSA, see our Interface edition. We'll also be holding a webinar on 5 December when we'll look at the impact of the OSA on affected businesses in light of the Ofcom consultation, as well as in the context of the EU's Digital Services Act. Register your interest here.

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