More from FTC v. Microsoft: all the news from the big Xbox courtroom battle
You can tell Xbox chief Phil Spencer is frustrated by the FTC’s questions here. He remains calm, but he shoots back to illustrate his knowledge of financials and acquisitions.
“Now you have a $70 billion upfront payment to Activision, right?” asks the FTC lawyer. Spencer’s response:
“No, when you acquire something it’s not a payment. It’s like when you buy a house. You’re buying an asset that has value so it’s really a transfer of cash into an asset called Activision, that you believe retains the value that you acquired. So to try and characterize the $70 billion as somehow spent is incorrect. Financially, it’s really moving $70 billion in cash into an asset, which is a game publisher, that to us is actually worth more than $70 billion, so it is not spent.”
This is getting rather tedious now. The FTC has console props in the courtroom to try and show the Xbox Series X / S and PS5 are very different to the Nintendo Switch.
It’s ”incorrect to say Nintendo isn’t a competitor,” says Xbox chief Phil Spencer and he comments on the visual appearance of the consoles in the courtroom:
“The PS5 and Xbox Series X shipped at the same time... from a form factor these two functionally look more equivalent.”
The FTC wants to know about the Xbox business and why Microsoft is spending nearly $70 billion on Activision Blizzard.
FTC: your business is not necessarily meeting its internal targets today?
“It is not right now, no,” admits Spencer.
FTC: so you’re paying $70 billion for a mobile business?
“The business is across mobile, PC and console, but when you think about the unique opportunity relative to our business today, it’s that mobile engagement that Activision drives.”
Spencer then says Microsoft is trying to grow the overall Xbox business it’s not just about console:
“We are trying to compete in the market by growing our business. Some of our business growth is something that our competitors would like to have, so some of our growth is probably from our competitors not realizing that growth themselves.”
The FTC is back to question Phil Spencer, and the FTC’s lawyer wants to run a little late to make sure we hear from a Google witness about Stadia.
The FTC begins by asking Spencer “can you swear under oath that you can promise that you’ll ship Call of Duty on PlayStation” without looking at the terms?
“That’s my goal yes. If what you’re trying to propose is that Sony might change the terms of how we ship games on our platform then that would prohibit us from shipping on their platforms.”
The FTC asks why the contract for CoD on PlayStation is different to standard Sony contracts:
“Sony is asking for significant commitments... even thought we know how to ship games on PlayStation that we do on a regular basis.”
After some back and forth about whether future Activision games will ship on PlayStation, a Microsoft lawyer objects and Judge Corley cuts in. “Your point has been made, move along.”
Spencer has spent most of his time after lunch discussing mobile, how Microsoft thought about buying Zynga, relationships with Sony, and how Microsoft’s rivals have far more exclusive games. This is your latest recap:
• Microsoft found “very limited success” of making mobile games outside of Minecraft.
• Microsoft tried to buy Zynga to rectify its missed mobile gaming opportunity.
• Spencer takes shots at Apple.
• Microsoft and Sony discussed the Activision deal with “positive affirmations” from Sony’s CEO.
• Spencer says Microsoft’s rivals have far more exclusive games
The FTC is worried about Microsoft making Activision Blizzard games exclusive, but Xbox chief Phil Spencer says competitors have a much larger collection of exclusives:
“Sony has a significant catalog of exclusives games. It’s drastically larger, dramatically larger than what we have on Xbox today. Both Sony and Nintendo’s first-party is stronger than Xbox.”
He also argues exclusives are just a normal part of the gaming business now:
“It is an established part of the console business, and Sony and Nintendo are very strong with their exclusive games.”
Sony also has an exclusive marketing deal for Final Fantasy XVI, says Spencer.
Phil Spencer is flicking through exhibits as he continues to be questioned by Microsoft’s lawyers about the Xbox business. He jokes he’s “never been around this much paper.”
The exchange followed questions around Xbox exclusives.
“Is it incorrect or correct to say that Microsoft will always make its games exclusive?” asked Microsoft’s lawyer.
“That’s incorrect,” says Spencer.
“Does that include ZeniMax games?”
“Yes,” says Spencer.
“And Activision games?”
“Yes,” Spencer confirms.
Microsoft argues exclusivity will always be a case-by-case decision, but the FTC fears it will make plenty of Activision games exclusive.
Xbox chief Phil Spencer says he had a call with Sony CEO Kenichiro Yoshida shortly after announcing Microsoft’s Activision deal. “I got positive affirmations from Yoshida-san,” says Spencer. He also had a “slightly longer” call with PlayStation chief Jim Ryan but the outcome was similar:
“He understood our rationale behind the deal. I think the email exchange showed he understood this was not about PlayStation.”
We heard about that email yesterday.
We know Microsoft wants to build a mobile Xbox store to take on Google and Apple, and Xbox chief Phil Spencer is taking shots at those platform holders today.
“Both Google and Apple exert control over the largest gaming platform,” says Spencer. “Apple won’t let us put a streaming app in their store, so we can’t bring console games through their storefront.”
Asked why Apple isn’t allowing an Xbox app in the App Store, Spencer says it’s about competition.
“Its competition for their control in the largest gaming platform. These are games that players want to play, we have a delivery mechanism to deliver games, they choose to block it.” He says Apple has “been allowed to do that.”
I wonder if Phil Spencer is wearing this T-shirt under his suit and tie? After all, Spencer says the console wars are a social construct.
Activision is key to Microsoft’s mobile strategy, Microsoft has argued over the past year. But this isn’t the first time Microsoft has tried to get into mobile. “We entered into some discussions with a company called Zynga, it ended up getting acquired by Take-Two,” says Spencer. Microsoft spent a lot of time talking to Zynga, Spencer confirms.
“In the end for our opportunity, we thought we needed to have something that was even bigger than Zynga was given our very small starting space in the mobile business.”
Microsoft’s mobile gaming travails are the big theme of this early testimony. Phil Spencer says Microsoft found “very limited success” making native mobile games outside the Minecraft series, and it turned to cloud gaming in hopes of winning players over that way:
“My real hope was the fact that we’d had at that point nearly 20 years of Xbox games built on our console platform that would give us a unique offer to players on phones.”
Turns out this didn’t work. Latency was an issue, things like game fonts weren’t designed for a tiny screen, and Microsoft never solved the controller problem. Remember, yesterday Microsoft contended that streaming is more of a feature than a separate product right now — so it says it’s not creating a monopoly risk by enhancing its own service.
We’ve started off with a conversation about the state of games industry revenue, focusing on the split between mobile and console revenue. “Mobile has grown to become the number one gaming platform on the planet,” Spencer acknowledges.
We’re on a 45-minute lunch break, so it’s time once again to recap Phil Spencer’s testimony. We knew there would be a lot here and there’s still more to come, but here’s what has happened so far:
• The FTC questioned Spencer about the Nintendo Switch, fps, teraflops, and lots more.
• Phil Spencer is asked whether Xbox lost the console wars, to which he responds that the console war is a “social construct” and he doesn’t wanna count the community out, but that Xbox is “in third place.”
• Sony is an aggressive competitor that spends its revenues on doing things to try and reduce Xbox’s survival on the market, says Spencer.
• Spencer says Sony is “actively signing third-party games to skip our platform,” as he is questioned over Microsoft acquiring exclusive content.
• Microsoft has thought about skipping PlayStation for Activision games and even considered making Minecraft Dungeons Xbox exclusive.
• Sony held back PS5 devkits which “put us behind on our development for Minecraft on PS5,” says Spencer.
• An internal email chain between Xbox’s Sarah Bond, Matt Booty, and Phil Spencer reveals how Microsoft planned to talk about the Bethesda acquisition as “making Xbox stronger.”
• Phil Spencer won’t confirm Elder Scrolls VI is an Xbox exclusive, and it sounds like it’s still many, many years away.
• Microsoft won’t degrade Call of Duty on PlayStation, says Spencer.
• Spencer swears under oath that he won’t pull Call of Duty from PlayStation.
Spencer notes that Microsoft would suffer damage from going back on its word in any case — “I think as we’ve seen even in preparation for this that gamers are an active and vocal group. Us pulling Call of Duty from PlayStation in my view would create irreparable harm for the Xbox brand,” he said. But now he’s also solemnly sworn it under oath.
“I would raise my hand, I would do whatever it takes,” he told Judge Corley in court. “My commitment is, and my testimony is, that we will continue to ship future versions of Call of Duty on Sony’s PlayStation 5.”
It is, perhaps, worth specifically noting the “5” in that oath.
Phil Spencer is back under Microsoft’s questioning, and he’s trying to dispel allegations that Microsoft would degrade a game like Call of Duty on PlayStation — an argument Sony in particular has made.
Building a “high-quality game for Xbox and building somehow a lower-quality game” on PlayStation would be a huge financial and reputational loss for Microsoft, says Spencer, given how much more successful (in his estimation) PlayStation is. Microsoft’s lawyer brings up an analogy: it would be like filming a good version of a movie to open in Omaha, but a bad one to launch in New York.
It’s a different question than whether Microsoft might withhold games altogether — something that means it would lose sales from PlayStation, but also would streamline development.
A 2021 interview notwithstanding, Spencer tells an FTC attorney that it’s too early to know:
“I think we’ve been a little unclear on what platforms it’s launching on, given how far out the game is. It’s difficult for us right now to nail down. ... It’s so far out it’s hard to understand what the platforms will even be at this point.”
So what about that interview? “I don’t know that I’ve made a public statement saying that,” said Spencer in response to questioning. “When I said it I believed it was [true], but if you ask me today I can’t recall a public statement.”
It’s part of a long line of questioning where the FTC tries to establish that an Activision Blizzard acquisition would lead to more exclusive games.
The FTC references a February 2021 email between Xbox’s Sarah Bond, Matt Booty, and Phil Spencer about how to announce the Bethesda acquisition.
“I want us to be bold in our announce of the Bethesda close, focus on Bethesda on Xbox,” Spencer wrote at the time. “I want us to get comfortable with saying... the acquisition of Bethesda is about making Xbox stronger. Our focus with Bethesda will be on the Xbox ecosystem.”
The FTC wants to know if Spencer had any other conversations with Microsoft executives about making Bethesda games exclusive to Xbox. “Exclusivity is a general topic in the console business, so it’s a constant conversation,” says Spencer.
“Do you anticipate Call of Duty on Switch will look the same to a player as if that player was playing on Xbox Series X?” asks the FTC. “I think it will play as a great Switch game,” says Xbox chief Phil Spencer. “I don’t think it will look the same.”
The FTC now wants to know if Microsoft has done any economic analysis of Nintendo in terms of the Activision Blizzard deal. Presumably because creating a version of Call of Duty for Nintendo Switch will be costly. The FTC once again wants to determine that the Switch is separate from its “high performance” console market.
The FTC lawyer then reminds Spencer of the Bethesda roundtable press event. “Do you remember that you said that if you’re an Xbox customer, this is about delivering great exclusive games for you on platforms where Game Pass exists?” asks the FTC. “Yes, I do,” says Spencer.
Xbox exclusive games is another key part of the FTC’s case, where the regulator believes Microsoft will make Activision Blizzard games exclusive to Xbox in a move it deems anti-competitive.
Minecraft still doesn’t have an optimized version for PS5, and it appears that a Sony decision to hold back sending Microsoft PS5 devkits ahead of launch is why.
“Sony was reluctant to ship us PlayStation dev kits... it put us behind on our development for Minecraft on PS5,” says Spencer. The FTC says Microsoft fought back by still not providing an optimized version of Minecraft on PS5 nearly three years later.
“There is a version of Minecraft that runs on PS5,” says Spencer, but this isn’t an optimized version it’s simply the PS4 version of the game. There isn’t an Xbox Series S / X optimized version of Minecraft, either.
Microsoft considered only shipping Minecraft Dungeons on Xbox and PC. The FTC references a chat between Phil Spencer and former Xbox CMO Mike Nichols where both considered and agree it should be exclusive to Xbox.
Minecraft Dungeons eventually shipped on PlayStation, Xbox, PC, and Nintendo Switch.
“Have you had conversations at Microsoft about skipping PlayStation with Activision titles?” Phil Spencer is asked by the FTC.
“I don’t remember a specific conversation, but it would seem like a normal conversation for us to have,” admits Spencer.
These conversations were part of an evaluation of Activision Blizzard ahead of the proposed acquisition announcement. Microsoft measures the economic and strategic value of an acquisition.
The FTC wants to know whether an asset could have a strategic value that outweighs the economics. So would Microsoft do something like make Activision games exclusive to Xbox as a strategic play, even if the economics might not make sense.
“There isn’t a value on the strategic, its a strategic analysis, it’s more of a commentary on how this asset fits into the strategy that we have, there is no numeric value assigned,” says Spencer.
The FTC is now questioning Phil Spencer about Call of Duty and negotiating deals with Activision for the Xbox Series S / X version for around the launch of that console in 2020.
A document mentions the revenue split offered, and we heard yesterday that Activision wanted a better split to work on an Xbox Series S / X optimized version.
The FTC is trying to establish the idea of Microsoft acquiring content so it doesn’t have to pay these fees and can have exclusive content. “If you own content you don’t have to pay for exclusive content?” asks the FTC.
“We don’t pay for exclusivity on our own platform,” says Spencer. He does note that Sony apparently signs deals to keep third-party games off Xbox.
“When a competitor is actively signing third-party games to skip our platform, it became more important to us to secure third-party games on our platform, inclusive of Call of Duty.”
The FTC is now questioning Phil Spencer about triple-A content.
“It is your view that Microsoft needs a predictable cadence of triple-A content for services,” asks the FTC.
“I think our customers need content that they know ship dates for to invest in our platform, yes,” says Spencer. He also agrees that Microsoft needs this type of content to drive acquisition of users for Xbox.
The FTC is also pushing Spencer on how many triple-A games come out each year. Obviously those are a small portion in the overall market, as there are a lot more indie games.