Tom Warren

Senior Correspondent

Tom WarrenJun 29, 2023

Microsoft calls FTC’s skepticism of cloud contracts ‘absolutely absurd.’

Microsoft has signed 10-year deals with Nvidia, Nintendo, and a bunch of other cloud gaming companies. The FTC is arguing that those agreements aren’t backed by financial analysis or numbers on theses “apparently amazing deals.” Microsoft says:

The question is, what is the output of those agreements? And there’s no dispute that Call of Duty is going to be in cloud services if the transaction goes through. So you asked and I asked every one of our executives whether they would honor these contracts, they said it in open court, they said it to you under oath, and they’ve said it for the last year to be honest. Are they really honestly suggesting that they weren’t credible? They’re going to get up in a public courtroom in front of you lie about whether they would honor these contracts. I mean, it’s absolutely absurd, really, it is to suggest that Satya Nadella got up in your courtroom and said he would honor it. In fact, he doesn’t even like exclusives. he would like his content to be everywhere.

FTC argues that Microsoft is “setting the terms of market competition on their own” and that Microsoft has no deals with Google or Amazon so they’re picking which company to deal with. Worth noting Microsoft isn’t going to sign a deal with Google when Stadia is dead, but it is interesting with Microsoft hasn’t signed a deal with Amazon for Luna.

Tom WarrenJun 29, 2023

Microsoft responds to FTC’s cloud concerns.

Microsoft argues that “everyone said that cloud isn’t an economically viable model” during their witness testimony.

Judge Corley cuts in: “maybe not right now... but we don’t have DVDs anymore. The FTC’s concern is about the future.”

Microsoft’s lawyer argues we might have a future of mobile where you have to develop native mobile games because phones are “going to be so powerful.” What about the cloud agreements:

MS lawyer: With all of these other streaming services… they are all going to have the ability to stream the game which they don’t have today.
Judge Corley to FTC: In some sense you won and got what you wanted, forced them into enter these agreements
FTC: We have evidence there are agreements... we do not have evidence of anything beyond agreements
Judge Corley: Why would Nvidia do what they did, say what they said? They’re a competitor to Microsoft in cloud gaming so why did they do it then?
FTC: That doesn’t count under the law because it’s not merger specific. The deal could have been achieved whether we were here or not... it was a sweetener.

Tom WarrenJun 29, 2023

Moving on to subscriptions and the cloud.

Judge Corley moves on to subscriptions and the cloud.

“The next big thing is multi-game subscriptions and then cloud,” says FTC’s lawyer, before acknowledging subscriptions are more developed at this point:

We’ve seen from Microsoft documents and their emphasis on cloud and subscriptions. Game Pass is a strategic driver for Microsoft’s gaming business. The effect of this transaction to turbo charge Game Pass... leave Google, Amazon ‘in the dust’ and build the content moat around Game Pass is in the record and compelling. There is a concern that you take this content and use it to advance your own platform and the consumer is harmed.

FTC argues the harm is “we end up in a world where instead of having content available, it’s all just Game Pass and maybe Sony has PlayStation Plus and those two suck up all the content and that’s it.”

This is a much stronger argument from the FTC than the console theory of harm and exclusivity. It’s clear Microsoft isn’t buying Activision Blizzard just for console, it’s about Xbox Game Pass and the future of that service in the cloud, mobile, and elsewhere.

Illustration by Alex Castro / The Verge

Tom WarrenJun 29, 2023

We’re back after a break.

We are back underway after a brief break there and we pick up on the protecting consumers point.

“We’re not here to protect Sony, we’re here to protect consumers,” argues the FTC, claiming it’s concerned if the deal goes ahead then Sony delays devkits (like it did with Minecraft) to Microsoft and that impacts consumers with delayed games.

The FTC claims this concern extends beyond Minecraft, but Microsoft’s lawyer argues that the testimony was related to only Minecraft. “This is their decision,” says Microsoft’s lawyer:

This is why we say they’re protecting Sony and not consumers. Sony is making that decision, and maybe that’s why they have twice as many players. I don’t know.

Tom WarrenJun 29, 2023

‘It’s not the harm to Sony, it’s the harm to consumers.’

It’s up to the FTC to argue their case here and it’s mainly been a single Microsoft lawyer arguing against a number of FTC lawyers.

Both sides have now moved onto legal arguments and citing previous cases. Microsoft argues that it’s all about Call of Duty at the core and Microsoft’s deals completely address the concerns.

Microsoft’s lawyer points to Final Fantasy VI and how Microsoft “just lost part of that game,” or Minecraft where Sony held back devkits:

If they can’t figure out what the harm is, so they’re turning to you or us and saying you should figure it out because it’s ‘too hard for us’

Microsoft’s lawyer argues that game exclusives are happening all the time:

No witness said there was going to be partial foreclosure. No one said that no one had any examples of it. And if it’s the partial exclusivity, as you said, and as Mr. Nadella said I thought the best. That’s the world we live in because Sony’s the market leader, and that’s what they do. There are partial, if that’s what they want to call partial foreclosures, that’s happening all the time with these partial exclusivity timed exclusivity arrangements, and that is part of competition is not part of anti competitive behavior.

The FTC points to evidence from Jim Ryan’s testimony about partial foreclosure and “the harms, for example to Sony, in terms of optimization,” but Judge Corley wants to know where the harm is. “It’s not the harm to Sony, it’s the harm to consumers.”

Tom WarrenJun 29, 2023

‘All this for a shooter video game?’

Judge Corley is still focused on Call of Duty:

Judge Corley: All of this is for a shooter video game? For this one game?

FTC: I completely understand where you’re coming from. On the other hand, our responsibility over on this side of the room and the government is not to make a value judgment about the market is to protect competition in the market.
Judge Corley: It’s the game but of the people that care so much that they would actually switch to an Xbox that they wouldn’t otherwise?
FTC: It’s not about just switching... the harm to the PlayStation person who has Call of Duty is when they wake up after this deal closes and some new character is only on Xbox. It’s not that the person is going to switch, it’s that person’s experience as the value that they paid for, has been degraded in some way

Judge Corley then asks what the FTC says to PlayStation chief Jim Ryan saying “there’s nothing anti-competitive to making ‘Star-whatever’ [Starfield] exclusive?” The FTC doesn’t know the basis of why Ryan was upset. “Because he does the same thing,” says Judge Corley.

Tom WarrenJun 29, 2023

Microsoft’s lawyer tries to correct the FTC and makes an Elder Scrolls mistake.

If there’s one rule I’ve learned as a journalist it’s never correct someone’s mistake with a mistake of your own.

Microsoft’s lawyer:

Could I clarify one issue that counsel raised with you, when you were asking about Zenimax and asked him to find a game that was most similar to Xbox, he mentioned Elder Scrolls. That is incorrect. There are two Elder Scrolls games, one is online called Elder Scrolls Online — that is a multiplayer game, it is on PlayStation today. The game he’s talking about Elder Scrolls 16... the projected release is 2026 as a single-player game. It is not anywhere similar to Call of Duty, which as you know is multiplayer and multi-platform.

Elder Scrolls 16?! Obviously Microsoft’s lawyer means Elder Scrolls 6, but also... 2026?! You heard it here first, even if it’s really unlikely it’s coming in 2026.

Tom WarrenJun 29, 2023

Nintendo Switch argument time.

I knew the Nintendo Switch would come back to haunt us once again.

Judge Corley: Why is the Xbox Series S priced at $299?

The FTC calls back to Xbox CFO Tim Stuart and the evidence where Microsoft’s Xbox Series S strategy price was to “get an entry level gen 9 system.” He says:

“When they were pricing it [at launch]... they didn’t say let’s try and triangulate with the Switch. Even if your honor there is some substitution on the Xbox Series S... we don’t think it’s enough to defeat the market we’ve put forward.”

Microsoft’s lawyer cuts in and says that Judge Corley “gets it” and that the $299 price shows they compete when a consumer is making a choice in a store like Best Buy.

The FTC then argues that “you can play video games on your phone, you can play a video game on the console,” but that they’re different. FTC once again says Microsoft didn’t look at Switch pricing during launch.

Microsoft’s lawyer fires back that “they both can do the same thing... but they’re also pricing off what’s in the market to look like it’s an alternative.” Microsoft cites Dr. Bailey’s charts that show games like Fortnite, Apex Legends, Rocket League, and other top games are available on both the Nintendo Switch and Xbox.

Tom WarrenJun 29, 2023

Why isn’t the PC an alternative to Xbox?

Judge Corley wants to know about consumer choice, because you can play a lot of Xbox Series X games on PC.

Judge Corley: What if they have a PC? Why isn’t everybody, particularly in 2023, likely to own a PC? So they don’t have to buy one.
FTC: The gaming PC is a special kind of PC, it’s not a run of the mill PC.
Judge Corley: Maybe I’m biased in the world I’m living in... during the pandemic. Nobody did it on a bargain basement PC. Everybody had a $1,000 or $1,500 PC.
Judge Corley: Why wouldn’t being able to play on PC have downward pressure on the Xbox? If you raise [a console] to $1,000?
FTC: For any given market where we assume the price increases fast then... almost anything becomes a substitute.

The FTC says it has seen no evidence that Microsoft is benchmarking the PC against an Xbox. The FTC could easily explain this to Judge Corley that a gaming PC requires a dedicated GPU to play Call of Duty, significantly increasing the price and complexity compared to the PCs people typically have at home or may have purchased during the pandemic.

The FTC could also argue and easily cite data that shows the vast majority of PC sales are laptops, which don’t have the ability to play games like Call of Duty. Instead, they’re going around in circles on basic questions where Judge Corley is trying to understand simple stuff.

It’s almost as if the FTC doesn’t understand the gaming market it’s trying to define.

Tom WarrenJun 29, 2023

We’re stuck here on a basic question.

Judge Corley wants to know some basics, whether Dr. Lee’s report was based on telemetry real data of how people play Call of Duty:

My question is about this foreclosure model. Because that’s important to MS having the incentive. That’s a mathematical incentive. That’s the nub of it.
A lot of people buy games and they play them once or twice and then never play them again. I guess I’m trying to figure out, I’m looking at the data that Dr. Bailey said and a lot of people buy it and don’t play it very much.
Is what [Dr. Lee] is seeing based on the number of hours played?

The FTC is now referencing confidential data and struggling to answer the question clearly.

Microsoft’s lawyer cuts in and says the company asked Dr. Lee about his calculations. “We don’t have any answers,” says Microsoft’s lawyer.

Tom Warren

Senior Correspondent

Senior Correspondent

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Tom Warren

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