More from FTC v. Microsoft: all the news from the big Xbox courtroom battle
Judge Corley wants to know what the harm to consumers is if the merger goes ahead and whether we’d be here if Sony had a deal with Microsoft for Call of Duty.
FTC: If the merger goes forward and if you believe that Microsoft has the incentive to advantage its own platform. There will be content, there will be timing issues, there will be exclusivity that benefits Xbox and not the PlayStation.
Judge Corley: Aren’t we just talking about Call of Duty? Sony just acquired another publisher and they make a lot of stuff exclusive. You’ve told me this has really always been about Call of Duty, how’s that going to drive?
Judge Corley: If Sony had a deal with Microsoft for Call of Duty, would we be here?
FTC: I think we would have still had an investigation.
Judge Corley: That’s good, but here on a preliminary injunction.
FTC: We would be here because of concerns about the other markets.
Judge Corley: Outside the console market, ok that’s fair.
FTC’s first opening argument:
Last Thursday, we promised the court the evidence in this hearing would show at the Federal Trade Commission has raised substantial questions about this proposed transaction. Substantial questions about whether this transaction would cause anti competitive effects. All the evidence is showing, your honor, that Call of Duty and triple-A games in particular drive games. The majority driver by far the synergies from Microsoft comes from driving users to engage and join Game Pass, because they understand the value of this content.
Judge Corley wants to know which Bethesda game is comparable to Call of Duty? FTC says The Elder Scrolls. FTC also argues Call of Duty is “so exceptionally valuable and so unique.”
We’re now on the homestretch of this hearing after five days of grueling testimony for all involved. It’s time to hear the closing arguments from both the FTC and Microsoft. After this Judge Corley will make a final decision in the coming days.
Investors have been trying to work out Microsoft’s exact Azure revenue for years and now they know thanks to the FTC v. Microsoft hearing. Unredacted documents, that have since been removed, have revealed Azure generated half the revenue of AWS in the 12 months ended June 2022. The Information reports that Azure generated $34 billion in 12 months compared to $72 billion for AWS in the same period. Sony has also had confidential data revealed in this case.
The end of FTC v. Microsoft is nearly here. Closing arguments will commence at 2:30PM PT / 5:30PM ET / 10:30PM UK. We’re expecting there to be a lot of back and forth during these arguments as both sides try to make their final case to Judge Corley.
If you’ve missed out on the hearing over the past few days, here’s where to catch up:
The FTC v. Microsoft witness testimony might be over for the day in the San Francisco, but it’s been a day full of news from regulators from outside the US.
First we learned that the Competition and Markets Authority (CMA) in the UK filed to try and delay Microsoft’s appeal of its Activision Blizzard acquisition decision. The Competition Appeal Tribunal (CAT) shut that request down, as it would have pushed the appeal process from July to October — “contrary to justice and fairness.”
Next Canada’s competition regulator intervened with a letter to Judge Corley pointing out it had “concluded that the proposed merger is likely to result in a substantial prevention and / or lessening of competition” in consoles, multi-game subscriptions, and cloud gaming.
Microsoft hit back almost immediately with a statement pointing out that the formal period for Canada’s regulator to prevent the deal from closing has already passed.
There’s already a lot going on with the FTC v. Microsoft case and many moving parts with other regulators as Microsoft approaches the July 18th deadline when its deal with Activision Blizzard expires.
As we approach closing arguments, Frank has had enough. He’s not been able to play ball for most of this week, so he’s gonna snooze through the closing arguments instead.
And no, he’s not named after Frank Shaw, lead communications at Microsoft. The only similarities here are that they both growl sometimes 😉
Witness testimony has ended for the day and we’re now on a break until 2:30PM PT / 5:30PM ET. That’s when closing arguments will be heard and this hearing will come to an official close. Not long to go folks.
If you missed Xbox CFO Tim Stuart’s earlier testimony then we have a recap right here. Let’s recap what Stuart said since then:
• Microsoft has Xbox Game Pass strategy tiers
• Microsoft has been contemplating the financial gaps of Xbox exclusivity
• The FTC accidentally lets slip that Xbox Game Pass would need to grow by 2 million subs a year to help offset Call of Duty exclusivity
• Nintendo Switch impacted Xbox Series S pricing
• The Xbox oil company and a mobile future
• Minecraft is a “significant” revenue driver for Microsoft, but not thanks to Xbox.
We’ll be back at 2:30PM PT / 5:30PM ET for closing arguments.
Microsoft’s attorney is asking Stuart to look at a revenue chart for Minecraft by platform, comparing different devices. Here’s loosely how it breaks down: Xbox is the smallest platform for Minecraft, PlayStation is roughly twice as big, and Nintendo’s platform is twice as big as PlayStation (or four times as big as Xbox.)
Mobile and PC numbers aren’t broken down, but they’re implied to be very large. Stuart also says this:
“Minecraft is one of the most profitable, if not the most profitable, IP that we have.”
The implication, of course, is that Microsoft would be leaving a lot of money on the table by locking it down — and that it would make just as little sense to take Call of Duty exclusive. The lawyer asks how Microsoft CFO Amy Hood would respond to a request like that. Stuart says:
“She would say probably that doesn’t make sense, we need to keep the existing business model running.”
The Canadian competition regulator intervened in the FTC v. Microsoft hearing earlier today, filing a letter to Judge Corley warning that it had:
concluded that the proposed merger is likely to result in a substantial prevention and / or lessening of competition with respect to gaming consoles and multigame subscription services (as well as cloud gaming)
Microsoft has now responded, making it clear the formal period for Canada’s regulator to prevent the deal from closing has already passed:
We received notice from the Canada Competition Bureau that it would continue to monitor our acquisition of Activision Blizzard after the formal waiting period preventing the deal to close expired. We continue to work with regulators around the world to address any remaining concerns - Microsoft spokesperson Rebecca Dougherty
Microsoft’s lawyer references comments from Xbox CFO Tim Stuart discussing the potential of mobile and Call of Duty mobile specifically. He compares mobile to electric cars:
We don’t want to be the oil company when the world shifts to 100 percent electric cars
Obviously the oil part here is consoles. He clarifies his comments:
You just don’t want to be on a business model that won’t exist in the future.
That doesn’t mean Microsoft thinks Xbox consoles are about to die, but it sure means they don’t see much revenue opportunity there compared to the mobile market.
We’re back on the Nintendo Switch beat again. I knew it would come eventually. Microsoft’s lawyer is questioning Xbox CFO Tim Stuart now.
Stuart confirms the Nintendo Switch is an Xbox competitor and has impacted the price of Xbox Series S:
Yes at that price point when you’re considering playing FIFA or Minecraft or any of the games across platform, you have to make sure your price relative to the competition in the market
We’re still hearing parts of emails about Microsoft offsetting shifts in revenues and the FTC just messed up and revealed Xbox Game Pass would need to grow by two million subscribers a year to help offset any Call of Duty exclusivity or reduced royalties from that decision.
It’s still not clear how much revenue Microsoft would lose in this scenario though, but it’s a surprise piece of data we weren’t expecting to hear today.
We’re now hearing evidence about Microsoft contemplating holding off games from PlayStation and offsetting those revenues against potential Xbox Game Pass subscribers.
This has to be something that Microsoft commonly looks as with these acquisitions, but the FTC points out that Xbox CFO Tim Stuart asks “What happens if revenue that Activision earns on PlayStation declines?” and then “Let’s calculate Game Pass subs and how much revenue would have to move over to Xbox to offset that gap.”
The FTC is implying here that Microsoft could take Call of Duty or other Activision games exclusive and try to make up the revenues with Xbox Game Pass subscriptions.
A colleague of Stuart’s, Jamie Lawver, a finance director at Xbox, ran the numbers to create a table that would show many subscribers Microsoft needed for Game Pass or how much Activision revenue would need to shift to console to make up for lost revenues from Sony.
Microsoft has been working on an Xbox mobile game store, but Apple and Google are blockers to that. We’re now hearing about how Activision content is also categorized with a view to this store.
“It assumes we are able to monetize the store on iOS and Android,” Xbox CFO Tim Stuart admits.
Companies like Microsoft and Spotify are hoping the EU’s Digital Markets Act will force Apple and Google to change how they distribute apps on mobile devices, and ultimately open their platforms and stores up to competition. Microsoft argues purchasing Activision is key to a mobile opportunity.
There’s a model for accelerating Game Pass, and Microsoft categorizes Activision games into tier 1, tier 2, and tier 3. Tier 1 content is the top games that will generated the most hours on Game Pass. “Hours played is heavily correlated to overall subscribers,” confirms Stuart. Call of Duty would be a tier 1 game.
It has been a long morning of Xbox financials, with the FTC laying out its case for Microsoft having an incentive to withhold Bethesda and Activision Blizzard games.
Xbox CFO Tim Stuart has been questioned for 90 minutes now, so let’s recap:
• FTC sets the stage with “Dump trucks of money” comment
• Xbox pricing changes
• The financial models for Bethesda and Activision Blizzard are key here
• Bethesda content first, better, or best on Xbox?
• Microsoft had five scenarios to pick for Bethesda games
• All Bethesda games exclusive? “Wow”
The FTC is trying to establish whether Microsoft’s different deal models could affect their console market share, so an incentive to close off games to competitors. Xbox CFO Tim Stuart is quizzed on if Microsoft’s deal models include whether Xbox console sales would increase.
FTC: does the strategic benefit of the deal include a shift in the mix in how of how many Xbox consoles that are sold?
Stuart: You’re asking about console ecosystem, there’s a lot of things that go into that. The console.. we don’t include any assumptions around share. If you’re asking about console ecosystem, share is included
We’re now hearing about a November 2021 meeting where Microsoft Xbox leaders had talked to Bethesda about exclusive games.
“Not just new IP but all games going forward? Wow,” says Xbox CFO Tim Stuart during the meeting, referencing a decision from Phil Spencer on Bethesda games. This would obviously differ hugely from the Bethesda deal model.
Canada’s Competition Bureau has written to Judge Corley to correct “factual inaccuracies” in the Microsoft / Activision court filings.
Microsoft had claimed three things its filings:
1 - Every single worldwide regulator that has examined the deal other than the FTC has rejected this theory [that Xbox will take COD away from PlayStation]
2 - As a result of these efforts, all but one foreign regulator to pass on the issue [cloud gaming] has cleared the transaction. The lone exception is the United Kingdom’s CMA.
3 - Ultimately, Lee’s analysis provides no basis to disregard the real world, where Sony has a favorable offer for COD, Xbox has made plain that it wants to provide COD to Sony (and in fact needs to continue to sell to Sony), and regulators around the world all agree that withholding COD from Sony would be unprofitable and is thus not a serious concern.
Canada’s regulator says:
Contrary to the foregoing quotations from the Memorandum, in a videoconference on May 5, 2023, the Bureau communicated to Microsoft and Activision’s Canadian counsel that the Bureau has concluded that the proposed merger is likely to result in a substantial prevention and/or lessening of competition with respect to gaming consoles and multigame subscription services (as well as cloud gaming), and that the Bureau is continuing to monitor the transaction
Xbox CFO Tim Stuart is now discussing five strategy scenarios that Microsoft was weighing up for Bethesda in February 2021, just ahead of the deal closing. They range from number one being fully cross-platform and number five being full Xbox exclusivity.
Full exclusivity would impact the deal valuation and when discussing these options Jerret West, Xbox CMO, said there would be “significant upset” to full exclusivity and there’s an admission that some leaders at Bethesda won’t be happy seeing games being cut from PlayStation.
The FTC is clearly trying to show that Microsoft’s deal models are flexible where they can potentially offset losses.
The FTC has just presented an email between Xbox CFO Tim Stuart and Xbox chief Phil Spencer, where Spencer says Stuart’s investor talk about Bethesda “sure did stir up a lot of stuff. Stuart responds:
Wish we could come out and say we’re taking [Bethesda content] all exclusive at this point.
Spencer responds: “we can’t say that.”
Another email between Stuart and Matty Booty, Xbox Game Studios chief, discusses making Bethesda’s games exclusives and the financial tradeoffs and concerns about valuation. The email mentions Xbox Game Pass subscriber growth, Xbox units, and offsetting these against the losses of taking games exclusive.
The FTC wants to make it clear that Microsoft would be willing to take a financial hit to boost Xbox Game Pass subscriber growth, sell more consoles, and ultimately bring more consumers to its Xbox platform.
We’re now hearing about a Jefferies investment meeting in November 2020 where Tim Stuart talks about not pulling Bethesda games. But the FTC reads out what he said:
We want that content, in the long run, to be either first, or better, or best, and pick your differentiated experience on our platforms. We will want Bethesda content to show up the best on our platforms.
The FTC wants Stuart to explain first, better, and best. He says first could be like Starfield, and FTC says better could mean better resolution? “Resolution is one thing, frame rate one thing. I was being pretty vague.”
Stuart argues that showing up in Game Pass could be a better experience. But Stuart also said previously that “better could be showing up in resolution.” He also said “I suspect you’ll continue to see us push for a first, better, or best approach on our platforms.”
This questioning clearly leans into the FTC and Sony’s concerns that Call of Duty could be “degraded” on PlayStation, or that games could be held back from competitor platforms.
The FTC and Tim Stuart are now discussing financial models for the Bethesda acquisition and Activision Blizzard. For both, Tim Stuart assumed no major changes in platform strategy.
The model for the Bethesda deal assumed there would be “non-Xbox platform revenue.” The FTC lawyer then says Activision required a financial revision, but Stuart doesn’t remember. The FTC brings up an updated forecast from Activision in January 2022, arguing it’s not a small revision. Not clear what triggered the updated forecast, but perhaps a game cancelation or delay. Stuart says it’s “relatively small” in the grand scheme of a 10-year model.
We’re now hearing about a September 16th, 2020 email between Tim Stuart, Amy Hood, Phil Spencer, Satya Nadella, and Jerret West, CMO at Xbox.
Stuart is updating the team about how the Xbox Series S pricing compares to the PS5 on the day of Sony’s pricing announcement. The information the FTC is pointing to in this email is redacted, so it’s not clear what pricing was discussed.
Another email two years later in 2022 is references where Spencer is updating the team about pricing moves from Sony. Stuart was discussing foreign exchange rates and probably discussing a price hike, which Microsoft eventually announced last week.