From the start, Microsoft’s hearing against the US Federal Trade Commission was going to be interesting to anyone who follows the business end of the video games industry.
As previously discussed, most of the major players in modern gaming maintain a firm hold on their internal data, so the discovery process in any games-related legislation often provides a few big stories from behind the scenes. FTC v. Microsoft was no exception to that rule.
The five-day hearing was punctuated by surprising revelations and the occasional accidental leak, all against the backdrop of Sony’s attempts to keep Microsoft in third place in the ongoing ninth-generation console war.
The FTC is seeking a preliminary injunction that could threaten the future of Microsoft’s attempted $69 billion acquisition of video game developer Activision Blizzard.
The agency filed for that injunction on June 12 alongside a restraining order, which would, if successful, prevent Microsoft from closing the acquisition for long enough that it would run into the original agreement’s final termination deadline. That would force Microsoft to pay Activision Blizzard a $3 billion penalty, as well as potentially halting the acquisition.
The hearing, which ran from June 22 to 29 in San Francisco, saw testimony from multiple Microsoft executives, including CEO Satya Nadella, Xbox head Phil Spencer, and corporate vice president Sarah Bond, as well as video deposition from Jim Ryan, CEO of Sony Interactive Entertainment.
The first day of the hearing set much of the tone for what was to follow.
The FTC’s case was built around the potential anti-competitive impact of the acquisition, where Microsoft would end up with exclusive control over several of the largest video game franchises in the modern business, most notably the Call of Duty series. That comes with the risk that Microsoft could leverage that control to hurt its competitors, such as Sony.
Conversely, Microsoft’s defense hinged on demonstrating that, both in theory and in practice, it doesn’t believe in console exclusivity. On the stand, Nadella testified that he was against the idea, saying he “would love to get rid of the entire exclusives on consoles.”
“But that’s not for me to define,” Nadella continued, “especially as a low-share player in the console market. The dominant player there has defined market competition using exclusives, so that’s the world we live in. I have no love for that world.”
‘The dominant player has defined market competition using exclusives, so that’s the world we live in. I have no love for that world.’
– Satya Nadella
Traditionally, exclusive games for a platform have been one of the biggest factors in competition between gaming consoles. Going as far back as the 16-bit era, you bought a Super Nintendo if you wanted to play Mario games and a Sega Genesis if you wanted to play Sonic the Hedgehog.
In the last couple of console generations, Sony has successfully pursued that strategy with a lineup of first-party video games that are exclusive to the PlayStation platform, although it’s recently relaxed that policy by releasing some of its recent hits, such as Horizon: Zero Dawn, on PC via Steam.
Meanwhile, Microsoft leaned heavily on its own system exclusives for the first two generations of Xbox hardware — it stopped doing so early in the Xbox One’s life cycle, largely to its overall detriment. Even games made by the first-party Xbox Game Studios network are always released simultaneously on Xbox and PC, and Microsoft is currently publishing Minecraft on two competitors’ platforms, the PlayStation and Nintendo Switch. When I reviewed Halo Infinite for GeekWire in late 2021, a game that was explicitly meant as an Xbox system-seller, it was on PC via Valve Software’s Steam client, with a code that was given to me by Microsoft’s media team.
Much of the FTC’s argument against Microsoft hinged on the forthcoming space-opera RPG Starfield, which was originally intended as a console exclusive for the PlayStation 5.
After its acquisition of Zenimax Media in 2020, Microsoft proceeded to make Starfield a console exclusive for the Xbox Series X|S. That move was subsequently brought up as a factor in the UK’s decision to block Microsoft’s acquisition of Activision Blizzard.
According to Spencer, the Xbox chief, however, Starfield’s initial exclusivity to the PlayStation platform is part of what spurred Microsoft to acquire ZeniMax in the first place.
“When we acquired ZeniMax, one of the impetus for that is that Sony had done a deal for Deathloop and Ghostwire [two 2020 games from ZeniMax’s studio network]… to pay Bethesda to not ship those games on Xbox,” Spencer testified, as per a transcript from the Verge.
“So the discussion about Starfield, when we heard that Starfield was potentially also going to end up skipping Xbox — we can’t be in a position as a third-place console where we fall further behind on our content ownership. So we’ve had to secure content to remain viable in the business.”
That recasts much of the industry conversation around Microsoft’s acquisition of Activision Blizzard. Sony, as the maker of the PlayStation and Microsoft’s main rival in the console market, has frequently objected to the acquisition on the basis that Microsoft could proceed to use Activision Blizzard’s franchises as leverage to harm the PlayStation.
Call of Duty is the primary driver of that accusation, and it’s not entirely without merit. Even beyond Call of Duty’s massive sales numbers, Sony revealed during the hearing that approximately 1 million PlayStation owners only play Call of Duty games, with another 6 million players who put over 70% of their gaming time into the franchise.
(This was an accidental reveal, as some of the documents Sony submitted as evidence in the hearing were inexpertly redacted. Someone marked out important details on those documents by scribbling over them with a black marker, which wasn’t enough to erase those details once the documents had been scanned for the court record.)
With that in mind, Call of Duty by itself is a major sales driver for game consoles. The FTC called Harvard’s Robin Lee as an expert, who testified that if Microsoft were to make the next Call of Duty an Xbox exclusive, it could mean a 5.5% boost in console market share at the PlayStation’s expense.
Even though Microsoft’s testimony and track record say it wouldn’t leverage Call of Duty like that (Nadella testified that doing so “makes no economic sense and no strategic sense”), giving it the ability to do so is a significant threat to Sony’s overall bottom line.
The FTC argued that that makes Call of Duty a “unicorn,” in the judge’s terminology: it’s a success story that can’t be easily replicated or replaced, given its 20-year history and prominence in the hobby. Microsoft’s expert, Dr. Elizabeth Bailey, countered that Lee’s model of the market is too narrow, and that Call of Duty is not a uniquely important property. It’s not the only multiplayer first-person shooter in the world; it’s simply the single most popular and visible example of the genre, with numerous competitors like Battlefield, Halo, Overwatch, or Counter-Strike.
From near the start of Microsoft’s run on this acquisition, Sony has been its loudest critic and strongest opposition.
While the FTC’s objection to the deal can easily be traced back to Chairwoman Lina Khan’s anti-monopolistic stance, it’s still ended up as effectively defending Sony, the leader in the international console market and a Japanese corporation, against an American company that barely counts as its competition.
With the reveal that Microsoft bought ZeniMax Media, and thus Bethesda Softworks, specifically to keep Sony from making Starfield a platform exclusive, it recasts Sony’s objection to the acquisition as, to paraphrase, a worry that Microsoft would do to it what it’s been doing to Microsoft for years.
Other interesting data points from the hearing included:
- Ryan, in pre-recorded testimony, claimed that publishers have told him that the Xbox Game Pass is “value destructive,” which makes it “unanimously” unpopular. This follows up on an admission from Microsoft, in documents submitted to the UK’s Competition and Markets Authority, that Game Pass “cannibalizes” sales for games on the service; however, it contradicts claims that Xbox made in 2021 that the Game Pass functions as a try-before-you-buy “discovery engine.”
- Microsoft had previously considered acquiring a number of other companies to strengthen its position in the video game market, including Sega (Sonic the Hedgehog, Yakuza), Bungie (Destiny 2), Thunderful (Steamworld Build, Planet of Lana), Niantic Labs (Pokemon Go), IO Interactive (Hitman), and Supergiant Games (Hades, Transistor).
- Documents unsealed during the hearing indicated that Microsoft plans to bring its next edition of Xbox hardware to market around 2028.
- That also connotes that there will even be a new generation of physical Xbox hardware, which flies in the face of industry predictions that the next frontier for gaming is the cloud.
- That doesn’t seem to match reality, however, as Microsoft’s Bond testified on June 23 that Xbox Cloud Gaming currently runs at a loss. Xbox Cloud Gaming, as per Bond, is primarily used by console users to play a game while waiting for it to download locally, rather than to play games via a phone or tablet linked to Microsoft’s cloud servers.
- Sony’s inexpert redaction also ended up revealing the budgets for two of its recent first-party video game projects. This year’s Horizon: Forbidden West was made in five years for $212 million, with a team of 300 employees, while it cost $220 million for 200 employees to make 2020’s The Last of Us Part II over 70 months time.
- This provides a rare unfiltered look into the costs and timeline of what’s often called “AAA” games, such as the projects currently under development at Amazon and Wizards of the Coast. If a company says they’re trying to make a AAA game, that signifies a team of dozens if not hundreds; a budget in the eight- to nine-digit range; and a development timeline that could easily run for five years or longer.
Both sides presented their closing statements on Thursday. U.S. District Judge Jacqueline Scott Corley’s decision is forthcoming.
