During another contentious day in court last Friday over the $68.2 billion acquisition of Activision Blizzard, Xbox chief Phil Spencer became the highlight of events for the day.
Despite a witness lineup that included a video deposition from PlayStation CEO Jim Ryan, questioning (behind closed doors) of Microsoft finance director Jaime Lawver and former Stadia head Dov Zimring, it was Spencer’s responses to a battery of questions about Xbox’s financial viability as a company within Microsoft that punctuated the day.
Day two of the FTC v. Microsoft trial over an injunction to the Activision deal was less bombastic than the first but still contained a treasure trove of information for laymen observers and FTC lawyers alike.
Following a 45-minute closed-door session between FTC lawyers and Microsoft’s finance director Lawver due to sensitive financial disclosures, Spencer took the stand for roughly 2 hours of questioning that began with how the Xbox’s “echo-system” operates.
We talk about Xbox ecosystem as the platform where creators build games for players to play.
Is Nintendo a competitor?
The FTC spent some of its early time questioning Spencer as an attempt to disqualify the Nintendo Switch as a competitor in the console gaming market based on its component packaging and specs.
By limiting the market of “viable” console manufacturers, the FTC could argue that any big moves such as acquiring Activision Blizzard harms the market because there are just less options for consumers. The FTC read back several statements from redacted files Spencer provided prior that stated the Switch was akin to “a Gen 8 device” based on CPU and GPU performance.
However, Spencer clarified in court on Friday, that Nintendo simply opted for a different platform play than traditional consoles which needed to be plugged in to operate.
The Switch was designed for people to take on the go. It has a battery; it’s a mobile platform people can take with them. Whereas the Gen 8 [Xbox One] consoles require that they’re plugged into the wall and don’t have a screen. Nintendo built a different platform.”
Spencer then goes on to reaffirm the Xbox has failed to keep up with Sony’s PlayStation or even Nintendo’s various offerings over the last 20 years.
We try to compete, but as I said, over the last 20 years we’ve failed to do that effectively.
It should be noted that the tactic of downplaying the Xbox as a third-rate failure is intentional and has been a through line for Microsoft executives in concurrent court days.
Furthermore, Spender also painted the PlayStation as an “aggressive competitor,” which takes up to 30 percent of revenue gained from games shipped by Microsoft to the platform, and uses that investment to reduce Xbox’s chances of survival in the market.
Perhaps, feeling as if it was losing headway in the direction of generally defined market competition, FTC lawyers pivoted to AAA content and exclusivity.
AAA content and Exclusivity
Spencer calmly countered assertions from the FTC’s line of questioning that Microsoft acquires content to avoid paying licensing fees and marketing contracts for exclusive titles.
While it’s well-established practice in the gaming market to buy exclusives, Microsoft began shifting away from that model of acquiring content during the roll out of the Xbox One and maintains its avoidance currently, allowing Spencer to rebuttal the FTCs claims with, “we don’t pay for exclusivity on our own platform.”
Spencer did note that Sony not only sign deals to gain access to exclusive content but also enters into contracts to keep games off the Xbox platform.
In what felt like a set for a “gotcha” moment, the FTC tracked out previous statements from Spencer indicating that Microsoft might possibly keep some of AActivision’s titles from its competitor platform, thus validating the FTC’s fears over the acquisition.
Spencer quickly added context to what should have been damning news by identifying that those were strategic cost analysis run by both Microsoft and Activision to see if there was an evaluation worth considering, there was not.
The FTC latched onto the topic and also surfaced communications from Microsoft early on that discussed making Minecraft an exclusive to only Xbox consoles and PCs. Ultimately, common sense prevailed and Minecraft was released to every system that it could be played on.
Following up the Minecraft exclusivity discussion was some talk about PlayStation dev kits and platform degradation. The FTC aided by some Sony talking points sought to get clarification from Spencer on the nature of Minecraft features, updates, and maintenance on PlayStation versus Xbox and PCs.
While Sony points the finger at Microsoft for unoptimized version of Minecraft for the PlayStation 5, Microsoft insist that Sony’s reluctancy to provided PlayStation dev kits to Microsoft for fear of competition, had slowed its own progress on receiving an optimized Minecraft experience for the PS5.
As a side note, Microsoft hasn’t provided an optimized Xbox Series experience either, perhaps nullifying claims of favoritism of unfair distribution from the company.
Spencer also took some time to clarify the details of the Bethesda acquisition and the exclusive titles of Redfall and Starfield as necessary.
Spencer discussed the notion that Sony was in talks to pay Bethesda to keep Starfield a PlayStation exclusive for an undetermined amount of time, thus prompting Microsoft to purchase the studio to make sure Xbox customers had access to the game.
Moving on, FTC lawyers were unable to pin down the exclusivity status of upcoming Elder Scrolls VI but did manage to get Spencer under oath promising to provide CoD to the PlayStation platform, something Microsoft has already drafted up in contract.
Mobile Gaming Future
The FTC briefly touched on the topic of mobile gaming, where Spencer reiterated Microsoft’s failures to be a viable competitor in that space, noting that Minecraft has been its only relative success.
On the topic of mobile gaming, Spencer revealed that Microsoft attempted to buy Zynga at the height of its popularity but lost out to Take-Two in the end.
Spencer also noted how Microsoft and Sony are essentially locked out of mobile with Apple and Google holding the keys to that sector, also educating FTC lawyers about streaming games and mobile app store policies.
Leaving behind exclusivity talk for some time, Spencer talked about the financial viability of the Xbox platform and how it cannot run at a loss unlike the narrative the FTC was crafting.
The Xbox platform as a business
The Xbox couldn’t eat the loss of over 2/3 of the customers that represent the PlayStation community to then hope an exclusivity play works out in the long term.
The Xbox team has internal goals and achievements it must reach, just like any other business and must be profitable at the end of the day.
Spencer also explained why the near $70 billion acquisition bid for Activision is less of a sunk cost but more of a managed asset that will need to justify itself.
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.
How Google Stadia played into this
Dov Zimring took the stand late in the day unclear who he was there to benefit, as much of what he testified to buttressed Microsoft’s general claim that cloud gaming is expensive and competition is stiff.
Zimring seemingly admitted that it couldn’t acquire the necessary AAA titles to keep its platform viable despite paying developers for them.
It was going to be far more expensive in the environment that we found ourselves in.
Day two wrapped up with Judge Corley cutting off FTC lawyers from belaboring points and attempts to tie Microsoft to contractual obligations on the stand, which some observers have noted, isn’t a good sign for the FTC.
Day three is scheduled for Tuesday June 27, 2023, at 8:30am PT, 11:30am ET, and 4:30pm UK. Be sure to stay tuned to OnMSFT.com for all the latest!