More from FTC v. Microsoft: all the news from the big Xbox courtroom battle
Phil Eisler, who leads the GeForce Now team at Nvidia, is discussing its cloud gaming platform:
“We’ve found over time that we get closer and closer to the quality of playing locally. Our cloud gaming servers are more powerful than consoles, so we’re able to run higher frame rates and add more visual effects.”
In terms of latency improvements, Eisler says:
“Well, one one way is that we’ve improved the frame rate, so originally it was 30 frames per second and then we increased it to 60 and then 120 and up to 240.”
I told you it was going to be a day full of video testimony. Next up we have Phil Eisler, who leads the GeForce Now team at Nvidia. It’s a nine-minute video.
Microsoft had previously kept its own games off GeForce Now to not compete with xCloud, but the Xbox maker signed an important deal with Nvidia earlier this year to bring its Xbox PC games to GeForce Now.
Dr. Lee is done with his testimony and we’re taking a 10-minute break until the next witness is called. It looks like the two Nvidia executives are coming up after the break. Let’s recap Dr. Lee’s testimony:
• Oh god they’re arguing about the Nintendo Switch again, please make it stop
• Breaking down Dr. Lee’s models
• Will Microsoft make Activision games exclusive?
• Will Call of Duty be removed from PlayStation?
• Will Microsoft block Activision content on rival cloud and subscription services?
• Cloud with a chance of competition
The FTC says it’s difficult to judge harm in a nascent market like cloud as it’s a market that’s still seeing new competition. It also argues that cloud gaming is a separate market, whereas Microsoft says it’s simply a feature.
Microsoft acquiring Activision content could have an impact on smaller cloud gaming services and emerging ones.
“The role that smaller entrants have can be greater than in other mature markets because if they can’t get access to content then harm from foreclosure could be magnified in the future,” says Dr. Lee.
The European Commission agreed a free license to consumers in EU countries that would allow them to stream via “any cloud game streaming services of their choice” all current and future Activision Blizzard PC and console games that they have a license for. Cloud providers will also be offered a free license to stream these games in EU markets. Microsoft has already claimed it will apply this automatic offer globally, but the FTC has largely dismissed Microsoft’s potential cloud agreements.
The FTC questions Dr. Lee around the likeliness of Microsoft keeping Activision content off rival subscriptions and cloud gaming services.
“It’s more likely because of the merger than absent the merger to engage in foreclosure of Activision content for library services and cloud streaming services,” says Dr. Lee.
So why didn’t Dr. Lee include cloud and subscriptions in his modeling? “Both are relatively nascent and new compared to console, and the lack of really good data for these services made it very difficult to perform something that I would review as reliable.”
Judge Corley wants to know about subscriptions being a separate market, as the FTC argues, because “aren’t they just a different way to pay for the same games?” Dr. Lee compares Xbox Game Pass to something like Netflix and whether Microsoft might be incentivized to raise prices if it has key content like Activision’s games and whether consumers would switch to another subscription or buy games individually.
The FTC’s lawyer wants to know more about partial foreclosure affecting competition.
FTC: Can partial foreclosure harm consumers?
Dr. Lee: Like exclusivity, it can be both pro and anti-competitive effects
FTC: Do you think that partial foreclosure can affect competition?
Dr. Lee: Yes
The FTC moves on to Call of Duty on Xbox and PC, and Judge Corley intervenes again and wants to know why wouldn’t people simply switch to a PC where they could play their games and get more value out of a PC to do productivity work and more.
Judge Corley: The Xbox Series S pricing is closer to the Switch, does it compete with the Switch?
Dr. Lee: There’s the Series X and PS5 and the Series S is still in that market. So if you’re thinking about a price increase on the Series X, the customers who buy the X console, they are more likely to switch to the PlayStation 5 or to a Switch? So this decides the market definition, evaluate a price increase on any of the products in the market.
Dr. Lee argues that he models and provides evidence that around 10-15 percent of folk who leave an Xbox would to go PlayStation or vice versa and that a “hypothetical monopolist... would find a five percent price increase, likely profitable.”
Microsoft’s lawyer wants to know Dr. Lee’s opinion on whether Call of Duty will be on PlayStation after the merger:
“I don’t agree that it will be on PlayStation for certainty,” says Dr. Lee, arguing that “it’s likely the foreclosure of Activision content will occur” in the console market.
Judge Corley cuts in and wants to get a clear answer. Lee says it’s likely that Activision content will be foreclosed, but he can’t say whether Call of Duty is likely to be with withdrawn from PlayStation.
There’s a back and forth and Judge Corley intervenes again: “There are a lot of popular games, not just Activision. And there’s no way of predicting what’s going to be the most popular game.”
Judge Corley wants to know why Dr. Lee hasn’t analyzed Call of Duty separately. Dr. Lee says Microsoft is likely to foreclose Call of Duty and other Activision titles.
A brief lunch break and Microsoft’s lawyer now continues to question Dr. Lee. This time it’s about Microsoft’s 10-year offer for Call of Duty on PlayStation.
“In my analysis I only look at agreements that have been signed,” says Dr. Lee. Microsoft’s lawyer points out there are agreements that have been signed between Microsoft and competitors. Microsoft’s lawyer is keen to point out an agreement for Final Fantasy 16 exclusivity.
Microsoft lawyer: One of the things Sony could do is take a game that was on multiple platforms and pay to have it only on PlayStation right?
Dr. Lee: That is my understanding. Do you have a particular example?
Microsoft lawyer: Do you know the game Final Fantasy 16?
Dr. Lee: I’ve heard of that game.
Microsoft lawyer: Do you know that it was on Xbox and PS5?
Dr. Lee: I don’t know what console that was released on.
After this exchange Dr. Lee is asked whether exclusive games are harmful to competition? Dr. Lee admits that exclusivity can have “both pro and anti-competitive effects.”
We’re taking a 30-minute break for lunch. It has been an intense hour and a half listening to Dr. Lee’s deposition with clear frustrations from both sides. Judge Corley is also trying to understand the modelling here and joked part of the way through as she stepped in to solve a basic math question.
We’ll be back soon with more models. I can’t. Wait. Honestly.
Microsoft’s lawyer has now introduced the UK’s Competition and Markets Authority (CMA) analysis of Call of Duty being Xbox exclusive and whether it would financially benefit Microsoft.
The CMA had originally provisionally concluded that a Microsoft strategy to withhold Call of Duty from PlayStation would be profitable, but Microsoft wasn’t happy with that and publicly criticized the regulator’s math. The CMA then adjusted its financial model and sided with Microsoft, leaving just cloud concerns for it to decide to block the merger.
Microsoft’s own survey used a wider number of users than the CMA’s own survey which includes a number of people who do not play Call of Duty. Microsoft’s questioning to Dr. Lee here is around whether he saw this survey and considered it in his own analysis. He confirms he didn’t look at the survey and things are getting a little more fraught around the questioning here. Microsoft’s lawyer sternly asks: “Professor Lee, can you answer my question?”
Microsoft has its own models for Activision games and analysis about keeping games exclusive. “Nobody at Microsoft recommended withholding Activision games,” says Microsoft’s lawyer. Dr. Lee responds:
“My understanding is that for consoles [Microsoft] recommended not exclusive, but for subscription services they recommended exclusivity.”
Microsoft’s lawyer is quick to point out Dr. Lee doesn’t have a model for subscription services, but it’s revealing that Activision games are important for Microsoft’s Xbox Game Pass subscription but not for pure console sales.
Earlier, PlayStation chief Jim Ryan said he was concerned about Microsoft using Call of Duty to damage PlayStation, and Sony would obviously be concerned with Call of Duty being bundled into Game Pass to tempt PlayStation players to switch to Xbox and not have to pay $70 for CoD.
OK we’re really getting into the weeds of the deal models here from Dr. Lee. This is key, because it’s quantitative analysis of the impact of Microsoft’s deal on competition.
Dr. Lee has two models: share and foreclosure. Both have separate inputs and different data sets and are designed to predict the impact of withholding Call of Duty from PlayStation.
Share model
The share model measures overall North American gen 8 console sales (Xbox One / PS4) and then applies a likely outcome if Call of Duty was removed from PlayStation.
It predicts that in the console market there would be a share shift of 8.9 percentage points, based on past sales data of Xbox One and PS4 consoles.
This share model uses only North American market data and no assumed conversion rate. The share model doesn’t predict content library share shift, nor cloud gaming.
Foreclosure model
The foreclosure model measures global console sales that includes gen 9 (Xbox Series S / X and PS5) to predict the future. Inputs in the foreclosure model aren’t the same as share model, as it has a conversion rate that assumes 20 percent of Call of Duty players would convert to Xbox.
In this foreclosure model it predicts a share shift of 5.5 percentage points. The model is designed to work out at what point the benefits would exceed the cost if Microsoft were to withhold Call of Duty from PlayStation. The foreclosure model doesn’t predict content library share shift, nor cloud gaming.
What does it all mean?!
This is all a little hard to follow precisely as some numbers are being redacted in this deposition as they’re sensitive and Microsoft’s lawyer is drawing diagrams I can’t see. But Microsoft’s lawyer argues that if Dr. Lee is wrong about the 20 percent conversion rate in the foreclosure model, if it was 15 percent then “it doesn’t give Xbox a net positive for an incentive or reason” to withhold Call of Duty.
Microsoft’s lawyer, Beth Wilkinson, is asking Dr. Robin Lee about the quantitative models he has used to create his report. Dr. Lee predicts how many PlayStation players would switch to Xbox if Call of Duty was exclusive to Xbox:
“On average during Call of Duty titles during generation 8, Xbox share would increase by 8.9 percentage points.”
Such a loss would come from PlayStation losing players, as Call of Duty isn’t available on Nintendo Switch. Wilkinson argues that Dr. Lee’s model takes the data from older consoles and then applies it to new consoles.
Wilkinson also points out that Dr. Lee doesn’t have models for share shift in multi-game subscriptions or cloud gaming where titles like Call of Duty are taken away fully.
Microsoft’s lawyer is questioning the FTC’s economic expert, Dr. Robin Lee. He has defined the PlayStation and Xbox as a “high performance” console market that’s separate to the Nintendo Switch.
This has been an argument between Microsoft and the FTC for all three days of this hearing. Microsoft’s lawyer is bringing up documents from Sony where it describes the Nintendo Switch as a competitor for contracts with Activision.
Lee is rather evasive in his answers about how he has defined the console market, which you can tell is frustrating Microsoft’s lawyer Beth Wilkinson.
I find this whole argument tedious. Of course PlayStation and Xbox compete with Nintendo Switch, but not in the same way as they compete with each other.
We’re now hearing a deposition from the FTC’s economic expert, Dr. Robin Lee.
Lee agrees with the FTC’s market definition of Xbox Series S / X and PS5 consoles as “high performance” instead of the broader market including consoles like the Nintendo Switch. Lee ran models on competitive analysis between Xbox Series S / X and PS5.
We have a short 5-minute break until the FTC calls its next witness. Here’s the recap of PlayStation chief Jim Ryan’s deposition:
• Sony is wary of sharing PS6 info with Microsoft
• Sony’s Activision alarm bells began ringing in August 2022
• What does Sony think about Starfield exclusivity?
• Jim Ryan confirms he told Activision Bobby Kotick he wanted Microsoft’s deal blocked
• The Sony bombshell email returns
• Sony is hedging against Xbox Game Pass
• Publishers don’t like Game Pass, Ryan says
• Xbox beat PS5 sales for three months in 2021
• Jim Ryan says cloud gaming won’t be a thing until at least 2025
PlayStation Now had a subscriber base of 3 million users, Ryan says. He predicts that cloud gaming won’t be a meaningful thing until at least 2025:
“I would say that cloud technology will become a meaningful component of how gamers access games between 2025 and 2035. We’re making significant investments in cloud in anticipation of it becoming a very meaningful way of how gamers access game content.”
Sony recently started testing cloud streaming for PS5 games, with plans to add this as a feature to its PlayStation Plus Premium subscription.
Jim Ryan confirms that Sony had some shipping constraints in 2021 that means Xbox Series S / X sales beat PS5 for around three months. He says there’s no other time during this latest generation where Xbox sales have materially exceeded PS5.
Jim Ryan speaking to those Fidelity investors said publishers don’t like Xbox Game Pass:
“I talked to all publishers they unanimously do not like Game Pass, because its value destructive.”
He defends the comments saying it’s a “very commonly held view by publishers.”
Microsoft lawyer: So you had no reason to think Mr. Kotick would put Call of Duty on Game Pass.. if this transaction was not completed?
Ryan: Correct.
Ryan also said to investors he was expecting more than 25 million Xbox Game Pass subscribers and that Sony’s 50 million PlayStation Plus subscribers during the investor meeting.
We’re now looking at notes from a meeting with Fidelity investors in February 2022. Jim Ryan discussed the importance of first-party content to fend off competition from Game Pass:
“One of the reasons why we are investing massively in first-party development and publishing is to provide us with an edge against pressure on a historic business model. Having a business model where you own elements from top to the bottom increases your ability to be self-determinant.”
Microsoft lawyer: Do you think it would be better if Microsoft kept Activision games on PlayStation?
Ryan: Yes, I do
Microsoft lawyer: So you do believe it’s in Microsoft’s best interests to make Activision games available on multiple platforms?
Ryan: No, I don’t agree with that
Microsoft lawyer: So if you were running Xbox, would you recommend making Call of Duty and other Activision games exclusive to Xbox and PC?
Ryan: That’s a hypothetical question that I don’t wish to answer
Microsoft lawyer: So you don’t get to answer?
Ryan: I don’t have enough knowledge to answer that question
Microsoft’s lawyers bring up the email between Jim Ryan and Chris Deering, former CEO of Sony Computer Entertainment, discussing the announcement of Microsoft’s Activision Blizzard deal last year.
“It is not an Xbox exclusivity play at all. They’re thinking bigger than that and they have the cash to make moves like this. I’ve spent a fair amount of time with both Phil [Spencer] Bobby [Kotick] over the past day and I’m pretty sure we will continue to see Call of Duty on PlayStation for many years to come.”
Deering replied.
“This deal would cement Microsoft as a player in mobile games. It strikes me as more of a king play than Call of Duty.” Ryan didn’t disagree.
Microsoft’s lawyers bring up Jim Ryan meeting with Activision CEO Bobby Kotick on the same day as the European Commission on February 21st. We’d previously heard Ryan had said to Kotick “I don’t want a new Call of Duty deal. I just want to block your merger.”
Jim Ryan confirms the meeting and what he said:
“I told him [Bobby Kotick] that I thought the transaction was anti-competitive, I hoped that the regulators would do their job and block it”
Ryan says Kotick wanted to “cover himself” with an extended Call of Duty deal with Sony:
“What Bobby wanted to do was cover himself by extending the marketing collaboration between Sony and Activision, in the event of the transaction not proceeding.”
Jim Ryan is asked if there’s anything wrong in Microsoft doing exclusives like Redfall. He says “I don’t like it but I fundamentally but have no quarrel with it.”
What about Starfield?
“I don’t like it, but I don’t view it as anti-competitive.”
Jim Ryan says an August August 26th, 2022 from Phil Spencer “really set alarm bells ringing” inside Sony. Up until that point Sony hadn’t negotiated an access agreement. Microsoft argues Sony didn’t have any initial concerns after a January 31st proposal email and calls to the Sony CEO and Jim Ryan.
“I wasn’t particularly happy with the January 31st proposal, but hoped that it was an opening salvo,” said Ryan. “I believe this transaction is bad for competition.”
Asked about whether Sony’s meeting with UK regulators in the summer of 2022 was before or after Spencer’s email, Jim Ryan can’t recall. “We certainly had one meeting with the CMA over the summer,” says Ryan.
Xbox chief Phil Spencer sent Jim Ryan a commitment list of games last year that would remain on PlayStation after the proposed Activision Blizzard deal closes.
The list included Overwatch but not Overwatch 2. “Other Activision games on PlayStation must be sufficiently broad, to fully align with gamers expectations,” said Ryan in the email. He calls it “not a meaningful list” in his deposition.