FTC v. Microsoft: all the news from the big Xbox courtroom battle

We’re finishing up here and talking about public and redacted documents. Judge Corley jokes “and no Sharpies!” referencing the incident where a Sony document was supposed to be redacted and yet you could see plenty of the confidential data.

We’re still arguing about Call of Duty here as it’s so central the case and clear that Judge Corley will rule based around Call of Duty.

Judge Corley: We wouldn’t be here if Microsoft made Call of Duty. It’s the purchasing right. We don’t benefit from just buying up each other. We benefit from keeping things separate and therefore incentivizing people to create themselves

Microsoft: That’s not true. We want smaller groups to create content, right? And the fact that someone purchased — and they’re not small anymore — Activision... they produce popular content and someone else wants to buy it to distribute it, and then someone else wants to make more content. And that’s the art that’s going on whether it’s movies, gaming, television, no one says if you don’t have this one game, or this one television program or movie, you can’t compete.

Judge Corley wants to know about the “Thor” game that gamers call God of War and wouldn’t Call of Duty on Game Pass pressure Sony to put God of War Ragnarök on PlayStation Plus?

The FTC argues that without the merger Activision could do its own Call of Duty deal for PlayStation Plus, but this deal cuts off that option.

“I don’t understand why Sony won’t make its PlayStation Plus subscription better?” asks Judge Corley, she wants to figure out this market and once again says this “all comes down to Call of Duty.” The FTC says Call of Duty is critically important.

We’re still debating the cloud gaming contracts.

Judge Corley: how is Microsoft giving Nvidia content not a positive for consumers?

FTC: It could be but we don’t know, we have no evidence

Judge Corley: That’s why in many ways I say you won. Because you and the other regulators have forced them into deals

FTC: I don’t think we won because... we have no evidence of what these agreements will lead to

The FTC says it can’t “declare victory on behalf of consumers” based on what it believes are hastily put together agreements, with some being signed on the eve of regulatory decisions.

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.

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.

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.

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.

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.”

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.

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.

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.

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.

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.

We now have a third lawyer trying to explain how many people will convert to Xbox if Microsoft withheld Call of Duty.

It feels like Microsoft’s witness, Dr. Bailey, offered an easy to understand argument for Judge Corley. Dr. Lee’s testimony wasn’t very clear for us to follow and I think that’s coming through with Judge Corley’s questioning here. But this is a complicated case with both sides arguing about different data to try and prove their points.

New FTC lawyer tries to bring its closing argument back on track.

“What’s tricky about this case is that you have to look at the specific data for each game,” he argues. Judge Corley wants to know what it is about Call of Duty that they’d abandon their console of choice and buy an Xbox? FTC:

If someone is spending $70 on Call of Duty they likely value that much more. Once they lose that because they no longer have access to the game on the platform they have to make a choice.

The FTC argues they choices are forgo the game or maybe play it on another console they might own if they happen to have an Xbox or they’ll have to go buy an Xbox. “This results in a share shift to Xbox,” says the FTC.

Judge Corley wants to know how you calculate the number of people would switch to Xbox, so Microsoft would have the economic incentive to foreclose:

Judge Corley: If everyone would give up on Call of Duty they don’t have the incentive. So how do you figure out the number of people who give up vs. buying an Xbox?

FTC: I’m not an economist again, but that’s based on looking at the behavior of players, based on potential past exclusivity and looking also at the sales behavior of probability.

Judge Corley says Dr. Bailey, who testified for Microsoft, “actually looked at real world data” and she wants to know what the FTC’s witness, Dr. Lee, looked at.

Judge Corley references that 62 percent of all PlayStation owners don’t play Call of Duty at all. “They’re not going to miss it, the foreclosure won’t affect them.”

Judge Corley: How do you decide that Call of Duty is so important to them?

The FTC struggles to respond and references Jim Ryan’s testimony instead of answering the question related to Dr. Lee’s testimony. “That’s not what I asked,” says Judge Corley.

Judge Corley is really fixated on Call of Duty here. Another FTC lawyer has stepped in to try and help explain.

Judge Corley wants to know what the harm to consumers is if the merger goes ahead and whether we’d be here if Sony had a deal with Microsoft for Call of Duty.

FTC: If the merger goes forward and if you believe that Microsoft has the incentive to advantage its own platform. There will be content, there will be timing issues, there will be exclusivity that benefits Xbox and not the PlayStation.

Judge Corley: Aren’t we just talking about Call of Duty? Sony just acquired another publisher and they make a lot of stuff exclusive. You’ve told me this has really always been about Call of Duty, how’s that going to drive?

Judge Corley: If Sony had a deal with Microsoft for Call of Duty, would we be here?

FTC: I think we would have still had an investigation.

Judge Corley: That’s good, but here on a preliminary injunction.

FTC: We would be here because of concerns about the other markets.

Judge Corley: Outside the console market, ok that’s fair.

FTC’s first opening argument:

Last Thursday, we promised the court the evidence in this hearing would show at the Federal Trade Commission has raised substantial questions about this proposed transaction. Substantial questions about whether this transaction would cause anti competitive effects. All the evidence is showing, your honor, that Call of Duty and triple-A games in particular drive games. The majority driver by far the synergies from Microsoft comes from driving users to engage and join Game Pass, because they understand the value of this content.

Judge Corley wants to know which Bethesda game is comparable to Call of Duty? FTC says The Elder Scrolls. FTC also argues Call of Duty is “so exceptionally valuable and so unique.”

We’re now on the homestretch of this hearing after five days of grueling testimony for all involved. It’s time to hear the closing arguments from both the FTC and Microsoft. After this Judge Corley will make a final decision in the coming days.

Investors have been trying to work out Microsoft’s exact Azure revenue for years and now they know thanks to the FTC v. Microsoft hearing. Unredacted documents, that have since been removed, have revealed Azure generated half the revenue of AWS in the 12 months ended June 2022. The Information reports that Azure generated $34 billion in 12 months compared to $72 billion for AWS in the same period. Sony has also had confidential data revealed in this case.

The end of FTC v. Microsoft is nearly here. Closing arguments will commence at 2:30PM PT / 5:30PM ET / 10:30PM UK. We’re expecting there to be a lot of back and forth during these arguments as both sides try to make their final case to Judge Corley.

If you’ve missed out on the hearing over the past few days, here’s where to catch up:

• Day 1: Microsoft opened the FTC hearing with a Sony bombshell

• Day 2: Has Xbox really lost the console wars?

• Day 3: Sony’s PlayStation chief says publishers hate Xbox Game Pass

• Day 4: Microsoft and Activision CEOs battle to keep a giant Xbox deal alive

The FTC v. Microsoft witness testimony might be over for the day in the San Francisco, but it’s been a day full of news from regulators from outside the US.

First we learned that the Competition and Markets Authority (CMA) in the UK filed to try and delay Microsoft’s appeal of its Activision Blizzard acquisition decision. The Competition Appeal Tribunal (CAT) shut that request down, as it would have pushed the appeal process from July to October — “contrary to justice and fairness.”

Next Canada’s competition regulator intervened with a letter to Judge Corley pointing out it had “concluded that the proposed merger is likely to result in a substantial prevention and / or lessening of competition” in consoles, multi-game subscriptions, and cloud gaming.

Microsoft hit back almost immediately with a statement pointing out that the formal period for Canada’s regulator to prevent the deal from closing has already passed.

There’s already a lot going on with the FTC v. Microsoft case and many moving parts with other regulators as Microsoft approaches the July 18th deadline when its deal with Activision Blizzard expires.

As we approach closing arguments, Frank has had enough. He’s not been able to play ball for most of this week, so he’s gonna snooze through the closing arguments instead.

And no, he’s not named after Frank Shaw, lead communications at Microsoft. The only similarities here are that they both growl sometimes 😉