Wednesday, May 17, 2023

UK CMA must regain trust as politicians question wisdom of Microsoft-ActivisionBlizzard block -- inappropriate Twitter statements don't help

The leadership of the United Kingdom's Competition & Markets Authority (CMA) must face the fact that its powers are neither unlimited nor unchecked. The CMA is not a state within the state that chooses its own leaders, determines all of its policies, collects its own taxes, makes its own laws, acts as its own judge. It is nominally independent, but at the end of the day it is simply a non-ministerial government department (NMGD). I'll discuss the limits of the CMA's independence further below.

The Business and Trade Committee of the British Parliament held an oversight hearing yesterday where the CMA's chair Marcus Bokkerink and CEO Sarah Cardell had to answer lawmakers' questions. The chairman of the committee--Labour MP (and tech policy expert) Darren Jones--diplomatically brought up the Microsoft-ActivisionBlizzard merger-blocking decision right at the start, and after Mrs. Cardell gave an initial answer, he also wanted to hear more specifically what the CMA has to say about the remedy question. It was a coincidence that the European Commission issued its conditional clearance decision the day before, accepting exactly the free-streaming-license remedy Microsoft had also proposed to the CMA.

Conservative MP Bim Afolami took the CMA to task. He raised all the right questions and was not prepared to content himself with evasive answers, so he always came back to the core issues. I was live-tweeting about the hearing and would like to refer you to that thread as opposed to summarizing it all again here. The first tweet of that thread already has more than a quarter million views. Let's now focus on what the overall situation looks like for the CMA.

The transaction has now been cleared in 37 countries with more than 950 million inhabitants (more than 14 times the UK's population size) and an aggregate GDP of $24.5 trillion, almost eight times that of the UK. So far the EU, which cleared the deal for its 27 Member States plus three more countries that are not EU Member States but members of the European Economic Area, is the one that got the most attention and bears the most weight. However, the seven non-EEA countries that previously cleared the deal have even more inhabitants (503 million) than the EEA (453 million), and even the non-EEA countries combined have more than 2.5 times the UK's GDP. That's why it would be wrong to make it only an EU-UK question: it's about the increasing isolation of the UK. The U.S. FTC doesn't count, especially because it can't block the deal without help from a court.

Not only are the jurisdictions that greenlighted the deal "OK" with it, but they've actually recognized the procompetitive benefits. They want the deal to close because it's good for consumers and for the competitive process (by the way, the Times of India discusses those positive effects in a new article). Cloud gaming operators like Nvidia and Boosteroid--the companies the CMA claims to protect--are actually in favor of the deal and against the CMA's stance. More clearance decisions will likely follow in the near term. But one UK government agency stands in the way.

The CMA surprisingly took to Twitter to defend its outrageous outlier ruling after the European Commission announced its way more sensible decision. It is probably unprecedented for one competition authority to comment on another's merger decision in that form. Some people thought it was "Trumpian", though the former POTUS would actually have needed only one tweet--not five--to convey the same message.

A majority of the people I polled on Twitter found that this communication style was "totally out of line" and only about 9% deemed it "appropriate conduct":

The CMA must realize that what it is doing is viewed unfavorably by far more people than the ones who support the agency. Last year, 75% of the 2,100 submissions to the CMA by members of the public were in favor of the deal. And on Twitter, where members of the worldwide gamer community follow the developments in this case, it's a similar picture. About twelve hours after the European Commission announced its decision (shortly after which the CMA voiced its disagreement), the EC had 1.2 million views versus the CMA's 800K, and especially more than 6,000 likes versus the CMA's 1,300:

Even the much older tweet with which the CMA announced its blocking decision on April 26 still has far fewer likes than the Commission's tweet about its ruling.

The limits of the CMA's independence

There are fundamental misconceptions out there regarding the CMA's independence. The first important thing to understand here is the difference between truly independent judges and an agency like the CMA.

Judges are appointed to the UK's higher courts by a special commission, and they can be removed from office only by a vote in both Houses of Parliament. By contrast, the CMA's leaders are simply appointed by the Business Secretary. Not even by the Prime Minister. No vote. Just the Business Secretary.

The Business Secretary herself can be replaced anytime by the Prime Minister, who also has the power to give directions (thus the "strategic steer" I discussed in my previous post on this topic) to government agencies.

Even a ministerial override of CMA merger decisions is possible. It doesn't matter all that much whether that is possible in this case: the Enterprise Act limits the scenarios in which the Business Secretary can simply decide a case. It's totally sufficient that the Business Secretary can replace the CMA's leadership, but it's also wrong to limit the analysis to the Business Secretary: the Prime Minister sets policies, and that enables him, regardless of what the Enterprise Act says about the Business Secretary's right to intervene, to tell the CMA what to do.

It doesn't mean anything that none of that has happened in the three weeks since the CMA issued its merger-blocking decision. It's too early. But the longer it takes, the more jurisdictions clear the deal, and especially if headway is made with the impending appeals by Microsoft and Activision to the Competition Appeal Tribunal (CATribunal, or CAT), the harder it is going to be for the CMA to refuse to be constructive. At some point, the Prime Minister may just say: "The buck stops here."

This is a complex web of interdependencies. Time is not on the CMA's side, unless it hopes that the deal will fall through, a favor that the parties are probably not going to do the CMA anytime soon.

Every "player" participating in this "game" seeks to minimize political and other costs:

A massive intervention by the executive government within a week or two of the CMA's decision would have drawn more criticism than it would at a later stage, after more things have happened. Imagine a scenario in which jurisdictions with collectively billions of inhabitants and a collective GDP that dwarfs the UK Economy have cleared the deal, and/or in which the CATribunal's judges have expressed their skepticism of the CMA's made-up theory of harm and irrational rejection of workable and reliable remedies. In such a situation, some measures that may appear unthinkable today could become reality.

One key milestone is definitely going to be the expiration of the current merger agreement (July 18). While everything the parties have said and done so far suggests they will work it out and see the appeal through, we might see some interesting dynamics in the first of July that could accelerate everything.

The CMA's leaders saw yesterday that there is quite some skepticism of the agency's regulatory excess in the parliamentary committee they're accountable to.

The CMA doesn't have "the power of the purse": its budget is decided by politicians. It can't just finance itself through fees or fines. It needs the Parliament's budgetary support.

Mr. Afolami MP brought up the question of whether it might be a good idea to change the standard of appellate review. The current Judicial Review standard makes it relatively hard--though far from impossible--to get CMA decisions reversed. If that standard was lowered, the CMA would have to be more careful.

Even under the current standard, the CMA wouldn't be able to issue a second blocking decision after losing the first appeal if the CAT pokes major holes into the CMA's argument. The Enterprise Act clearly says that the CMA must "make a new decision in accordance with the ruling of the Competition Appeal Tribunal" (emphasis added).

At this point, the CMA very much wants Parliament to enact the DMCC Bill, the UK equivalent of the EU's Digital Markets Act (DMA). I couldn't help but highlight the contradiction between what the CMA says about rival mobile app stores in its Microsoft-Activision decision and what it said in a statement issued the same day that sought to link its merger ruling to digital platform regulation. In connection with the DMCC Bill, the standard of appellate review is also a topic of discussion. It's not unthinkable that the outcome of the legislative process could be that the DMCC Bill gets enacted, but the standard of review for all of the CMA's decisions is modified at the same time.

The CMA is falling out of favor with politicians and a majority of the gamers it incorrectly claims to protect.

My key takeaways from yesterday's parliamentary committee session are that the CMA has no mandate to behave as if it were "the world's policeman" for mergers (which would be to the detriment of the UK economy), and that it must make some very smart decisions now in order to regain the trust that it has lost. The CMA has gone too far and needs an exit strategy. Twitter threads like the one on Monday--or the claim on April 26 that it was about protecting competition in cloud gaming when Microsoft's competitors like Nvidia and Boosteroid actually support the transaction--are inconducive to the agency's credibility.