Microsoft President Brad Smith is pissed with Britain. He thought his company's $68.7 billion acquisition of Activision was a done deal, but Britain's merger watchdog just blocked it.

In a BBC radio interview, Smith pretty much threatened that Microsoft could pull back from investing in Britain, if Prime Minister Rishi Sunak does not step in to overrule this week's judgement by the Competition and Markets Authority.

Sounding personally hurt and shocked by the decision, Smith painted the UK as isolated, out-of-touch and out-of line. But there's more to this story than meets the eye.

Darkest day

"It's the darkest day in our four decades in Britain," Smith said. It shook the company's confidence in Britain as a place to grow a technology business, he said, and would "not help" decisions about future investments in the country.

It's perhaps a surprise that the UK's regulator has any power over the merger of two US companies. In fact, the CMA is one of a number of regulators worldwide looking into the deal, and others have expressed concerns. The FTC in the US, and the European Union have both asked probing questions.

Activision makes the leading video games Call of Duty, World of Warcraft, Diablo, Overwatch, and Candy Crush. Microsoft's Xbox games consoles have a 70 global percent share, and its Azure is the world's number two cloud platform provider.

The acquisition potentially gives it a stronger hold over the console market, with the ability to tie users and games into its platform, but it also seeks to gain strength in the nascent cloud gaming market, where users play games running on remote servers, without the need to buy a console.

The CMA ruled that the merger would give Microsoft too much power over cloud gaming, stifling innovation and competition in the sector before it has properly begun. The sector has been around for two years and already Google has canceled its online gaming service Stadia, and Amazon's Luna is suffering from layoffs, leaving Microsoft in the lead. The presence of Activision's dominant games would effectively kill competition, the CMA said.

Can Britain play?

Smith's comments about Britain aren't pretty. He implies that, since Brexit, Britain has made itself hostile to technology investment: "The English Channel has never seemed wider," he said, adding that Europe is a continent that is "attractive to investment," and "Brussels is a place where one can sit down and actually have a conversation with the regulators who are accountable to the elected leaders."

By contrast, in London, he said regulators are "not only unelected but unaccountable and now making decisions that just feel fundamentally unwise."

"For all of us who had some hope that post-Brexit, the UK would construct a structure that would even be more flexible, that would be better for investment, better for technology - we're now finding that the opposite appears to be true."

There's some logic to this. Brexit has proven to be an act of economic self-harm. The UK is the only major economy that is poorer now than before the pandemic. Its economic growth is bottom of the G20, below Russia. In other words, it looks very much as if the UK has single-handedly inflicted more harm on itself than the international community's sanctions have managed to impose on Russia.

And in the area of technology regulation, Britain does indeed look confused. Its decision to create its own alternative to the European Union's GDPR will increase the compliance burden on businesses trading in the UK and EU, and add to the difficulties businesses face.

Cloud front?

But in this instance, Britain is not as out of line as Smith claims. Its move wasn't really unexpected, and it was ruling on a different part of the question.

Brad Smith says the CMA "went silent" when it offered to answer any more questions: "We had answered every question that the CMA panel had put to us and we specifically said, if you have any other questions, or if you have any other concerns, please let us know. We heard nothing from them."

From the CMA's point of view, it might just be that they had heard all they needed, and didn't need any more filibustering from Microsoft.

CMA chief Sarah Cordell told the BBC that in six month's negotiation, "Microsoft had ample opportunity to put their case to us. We reached the decision on the basis of a huge amount of engagement. We looked at more than a million documents to reach our final decision."

In focusing on cloud gaming, the UK regulator took a different tack to the FTC and the EU, which concentrated on fears about competition in the console market. Microsoft made substantive offers on that, guaranteeing that Activision games would be available on rival platforms like Sony Playstation for ten years.

Smith thinks that cloud gaming is too small to matter right now: "Microsoft can't even stream games to more than 5000 people at a time in the entirety of the United Kingdom," he said, complaining at regulators seeking to "torpedo a $68 billion global transaction out of a concern about a part of the business that is so small."

For Cordell, that's just the point. She argues that giving Microsoft control of that sector before it grows would be a mistake: "Cloud gaming has got potential really to transform the way that people can engage and access games. So what we want to see in that market, as I say, is a market that's really open to competition," she said. Combining Microsoft's Xbox and cloud business with Activision's portfolio would "reinforce Microsoft's strong position in cloud gaming, and that would be problematic because it would really harm the ability of other competing cloud platforms to compete effectively and offer the kind of innovation and product choice that we want to see in this market."

Doing the FTC's work?

Many people predicted that the CMA would do just as it did - and it's been argued in multiple places that the FTC was effectively relying on it to block a merger that might be harder to do on the home turf of both Activision and Microsoft.

Back in February, professor of law Anne C. Witt predicted the CMA would do what it just did. “The FTC can count on the CMA to block it,” she told Bloomberg, explaining that the UK regulator was simply the first to file, at a time when the EU and the FTC were simply listing objections.

Smith tried to characterize the CMA as being out of line with other regulators, but it's pretty likely it was simply saying out loud what they are thinking.

Lawyer Florian Mueller, who has consulted for Microsoft, says that Sunak should overrule the CMA's "outrageous" decision, while the CMA's Sarah Cordell ducked the question of whether such an intervention was conceivable. Other observers have noted that efforts to reverse CMA decisions in the UK courts usually fail.

Brad Smith this trying to portray post-Brexit Britain as a tinpot backwater and bully it into compliance with his desires.

Since Brexit, it is certainly true that the UK is now vulnerable to this kind of threat, in a way it never would have been as part of the EU.

But Microsoft is going to have to come up with a better argument on the actual case in question.