A California judge ruled in Microsoft’s favor on the FTC’s request for a preliminary injunction blocking its $68.7 billion purchase of Activision Blizzard. The FTC is now appealing its loss to Microsoft, all before the deal deadline of July 18th. The Ninth Circuit Court of Appeals will now need to rule on Judge Jacqueline Scott Corley’s decision and even whether there should be an extension to a temporary restraining order (TRO) which is currently set to expire at 11:59PM PT on Friday July 14th.
This restraining order is the key part of the deal right now, as if there is no order in place then Microsoft has a window of opportunity to close its Activision Blizzard deal. But there’s still the problem of the UK’s regulators blocking the deal.
The UK’s Competition and Markets Authority (CMA) and Microsoft have agreed to pause their legal battles to figure out how the transaction might be modified in order to address the CMA’s cloud gaming concerns. The CMA blocked Microsoft’s deal earlier this year, citing competition fears in the emerging cloud gaming market.
The CMA has warned that a proposed restructuring of its merger could result in it starting a new investigation and the regulator has issued a notice of extension for its overall investigation into the deal, moving the date for final undertakings or a final order from July 18th to August 29th. Under the terms of the deal, Microsoft has until July 18th to try and close its proposed acquisition; otherwise, it has to renegotiate new terms or pay $3 billion in breakup fees to Activision Blizzard.
You can read a full summary of each day of the FTC v. Microsoft hearing here:
- Day one: Microsoft opened the FTC hearing with a Sony bombshell
- Day two: Has Xbox really lost the console wars?
- Day three: Sony’s PlayStation chief says publishers hate Xbox Game Pass
- Day four: Microsoft and Activision CEOs battle to keep a giant Xbox deal alive
- Day five: Microsoft’s FTC fight comes down to Call of Duty
Follow along for all our ongoing coverage of Microsoft’s battle with the FTC over its Activision Blizzard deal.
Jun 29Minecraft is a “significant” revenue driver for Microsoft, but not thanks to Xbox.
Microsoft’s attorney is asking Stuart to look at a revenue chart for Minecraft by platform, comparing different devices. Here’s loosely how it breaks down: Xbox is the smallest platform for Minecraft, PlayStation is roughly twice as big, and Nintendo’s platform is twice as big as PlayStation (or four times as big as Xbox.)
Mobile and PC numbers aren’t broken down, but they’re implied to be very large. Stuart also says this:
“Minecraft is one of the most profitable, if not the most profitable, IP that we have.”
The implication, of course, is that Microsoft would be leaving a lot of money on the table by locking it down — and that it would make just as little sense to take Call of Duty exclusive. The lawyer asks how Microsoft CFO Amy Hood would respond to a request like that. Stuart says:
“She would say probably that doesn’t make sense, we need to keep the existing business model running.”
- Microsoft responds to Canada’s competition regulator.
The Canadian competition regulator intervened in the FTC v. Microsoft hearing earlier today, filing a letter to Judge Corley warning that it had:
concluded that the proposed merger is likely to result in a substantial prevention and / or lessening of competition with respect to gaming consoles and multigame subscription services (as well as cloud gaming)
Microsoft has now responded, making it clear the formal period for Canada’s regulator to prevent the deal from closing has already passed:
We received notice from the Canada Competition Bureau that it would continue to monitor our acquisition of Activision Blizzard after the formal waiting period preventing the deal to close expired. We continue to work with regulators around the world to address any remaining concerns - Microsoft spokesperson Rebecca Dougherty
- The Xbox oil company and a mobile future.
Microsoft’s lawyer references comments from Xbox CFO Tim Stuart discussing the potential of mobile and Call of Duty mobile specifically. He compares mobile to electric cars:
We don’t want to be the oil company when the world shifts to 100 percent electric cars
Obviously the oil part here is consoles. He clarifies his comments:
You just don’t want to be on a business model that won’t exist in the future.
That doesn’t mean Microsoft thinks Xbox consoles are about to die, but it sure means they don’t see much revenue opportunity there compared to the mobile market.
- Nintendo Switch impacted Xbox Series S pricing.
We’re back on the Nintendo Switch beat again. I knew it would come eventually. Microsoft’s lawyer is questioning Xbox CFO Tim Stuart now.
Stuart confirms the Nintendo Switch is an Xbox competitor and has impacted the price of Xbox Series S:
Yes at that price point when you’re considering playing FIFA or Minecraft or any of the games across platform, you have to make sure your price relative to the competition in the market
- Xbox Game Pass would need to grow by 2 million subs a year to help offset CoD exclusivity.
We’re still hearing parts of emails about Microsoft offsetting shifts in revenues and the FTC just messed up and revealed Xbox Game Pass would need to grow by two million subscribers a year to help offset any Call of Duty exclusivity or reduced royalties from that decision.
It’s still not clear how much revenue Microsoft would lose in this scenario though, but it’s a surprise piece of data we weren’t expecting to hear today.
- Making up the Xbox financial gaps of exclusivity.
We’re now hearing evidence about Microsoft contemplating holding off games from PlayStation and offsetting those revenues against potential Xbox Game Pass subscribers.
This has to be something that Microsoft commonly looks as with these acquisitions, but the FTC points out that Xbox CFO Tim Stuart asks “What happens if revenue that Activision earns on PlayStation declines?” and then “Let’s calculate Game Pass subs and how much revenue would have to move over to Xbox to offset that gap.”
The FTC is implying here that Microsoft could take Call of Duty or other Activision games exclusive and try to make up the revenues with Xbox Game Pass subscriptions.
A colleague of Stuart’s, Jamie Lawver, a finance director at Xbox, ran the numbers to create a table that would show many subscribers Microsoft needed for Game Pass or how much Activision revenue would need to shift to console to make up for lost revenues from Sony.
- Xbox mobile store time.
Microsoft has been working on an Xbox mobile game store, but Apple and Google are blockers to that. We’re now hearing about how Activision content is also categorized with a view to this store.
“It assumes we are able to monetize the store on iOS and Android,” Xbox CFO Tim Stuart admits.
Companies like Microsoft and Spotify are hoping the EU’s Digital Markets Act will force Apple and Google to change how they distribute apps on mobile devices, and ultimately open their platforms and stores up to competition. Microsoft argues purchasing Activision is key to a mobile opportunity.
- The Xbox Game Pass strategy tiers.
There’s a model for accelerating Game Pass, and Microsoft categorizes Activision games into tier 1, tier 2, and tier 3. Tier 1 content is the top games that will generated the most hours on Game Pass. “Hours played is heavily correlated to overall subscribers,” confirms Stuart. Call of Duty would be a tier 1 game.
- A 15-minute break, time to recap.
It has been a long morning of Xbox financials, with the FTC laying out its case for Microsoft having an incentive to withhold Bethesda and Activision Blizzard games.
Xbox CFO Tim Stuart has been questioned for 90 minutes now, so let’s recap:
• FTC sets the stage with “Dump trucks of money” comment
• Xbox pricing changes
• The financial models for Bethesda and Activision Blizzard are key here
• Bethesda content first, better, or best on Xbox?
• Microsoft had five scenarios to pick for Bethesda games
• All Bethesda games exclusive? “Wow”
- A shift in Xbox sales?
The FTC is trying to establish whether Microsoft’s different deal models could affect their console market share, so an incentive to close off games to competitors. Xbox CFO Tim Stuart is quizzed on if Microsoft’s deal models include whether Xbox console sales would increase.
FTC: does the strategic benefit of the deal include a shift in the mix in how of how many Xbox consoles that are sold?
Stuart: You’re asking about console ecosystem, there’s a lot of things that go into that. The console.. we don’t include any assumptions around share. If you’re asking about console ecosystem, share is included
- All Bethesda games exclusive? ‘Wow.’
We’re now hearing about a November 2021 meeting where Microsoft Xbox leaders had talked to Bethesda about exclusive games.
“Not just new IP but all games going forward? Wow,” says Xbox CFO Tim Stuart during the meeting, referencing a decision from Phil Spencer on Bethesda games. This would obviously differ hugely from the Bethesda deal model.
- Canada’s competition regulator enters the chat.
Canada’s Competition Bureau has written to Judge Corley to correct “factual inaccuracies” in the Microsoft / Activision court filings.
Microsoft had claimed three things its filings:
1 - Every single worldwide regulator that has examined the deal other than the FTC has rejected this theory [that Xbox will take COD away from PlayStation]
2 - As a result of these efforts, all but one foreign regulator to pass on the issue [cloud gaming] has cleared the transaction. The lone exception is the United Kingdom’s CMA.
3 - Ultimately, Lee’s analysis provides no basis to disregard the real world, where Sony has a favorable offer for COD, Xbox has made plain that it wants to provide COD to Sony (and in fact needs to continue to sell to Sony), and regulators around the world all agree that withholding COD from Sony would be unprofitable and is thus not a serious concern.
Canada’s regulator says:
Contrary to the foregoing quotations from the Memorandum, in a videoconference on May 5, 2023, the Bureau communicated to Microsoft and Activision’s Canadian counsel that the Bureau has concluded that the proposed merger is likely to result in a substantial prevention and/or lessening of competition with respect to gaming consoles and multigame subscription services (as well as cloud gaming), and that the Bureau is continuing to monitor the transaction
- Microsoft had five scenarios to pick for Bethesda games.
Xbox CFO Tim Stuart is now discussing five strategy scenarios that Microsoft was weighing up for Bethesda in February 2021, just ahead of the deal closing. They range from number one being fully cross-platform and number five being full Xbox exclusivity.
Full exclusivity would impact the deal valuation and when discussing these options Jerret West, Xbox CMO, said there would be “significant upset” to full exclusivity and there’s an admission that some leaders at Bethesda won’t be happy seeing games being cut from PlayStation.
The FTC is clearly trying to show that Microsoft’s deal models are flexible where they can potentially offset losses.
- ‘Wish we could come out and say we’re taking it all exclusive.’
The FTC has just presented an email between Xbox CFO Tim Stuart and Xbox chief Phil Spencer, where Spencer says Stuart’s investor talk about Bethesda “sure did stir up a lot of stuff. Stuart responds:
Wish we could come out and say we’re taking [Bethesda content] all exclusive at this point.
Spencer responds: “we can’t say that.”
Another email between Stuart and Matty Booty, Xbox Game Studios chief, discusses making Bethesda’s games exclusives and the financial tradeoffs and concerns about valuation. The email mentions Xbox Game Pass subscriber growth, Xbox units, and offsetting these against the losses of taking games exclusive.
The FTC wants to make it clear that Microsoft would be willing to take a financial hit to boost Xbox Game Pass subscriber growth, sell more consoles, and ultimately bring more consumers to its Xbox platform.
- Bethesda content first, better, or best on Xbox?
We’re now hearing about a Jefferies investment meeting in November 2020 where Tim Stuart talks about not pulling Bethesda games. But the FTC reads out what he said:
We want that content, in the long run, to be either first, or better, or best, and pick your differentiated experience on our platforms. We will want Bethesda content to show up the best on our platforms.
The FTC wants Stuart to explain first, better, and best. He says first could be like Starfield, and FTC says better could mean better resolution? “Resolution is one thing, frame rate one thing. I was being pretty vague.”
Stuart argues that showing up in Game Pass could be a better experience. But Stuart also said previously that “better could be showing up in resolution.” He also said “I suspect you’ll continue to see us push for a first, better, or best approach on our platforms.”
This questioning clearly leans into the FTC and Sony’s concerns that Call of Duty could be “degraded” on PlayStation, or that games could be held back from competitor platforms.
- Financial models for Bethesda and Activision Blizzard.
The FTC and Tim Stuart are now discussing financial models for the Bethesda acquisition and Activision Blizzard. For both, Tim Stuart assumed no major changes in platform strategy.
The model for the Bethesda deal assumed there would be “non-Xbox platform revenue.” The FTC lawyer then says Activision required a financial revision, but Stuart doesn’t remember. The FTC brings up an updated forecast from Activision in January 2022, arguing it’s not a small revision. Not clear what triggered the updated forecast, but perhaps a game cancelation or delay. Stuart says it’s “relatively small” in the grand scheme of a 10-year model.
- Xbox pricing changes.
We’re now hearing about a September 16th, 2020 email between Tim Stuart, Amy Hood, Phil Spencer, Satya Nadella, and Jerret West, CMO at Xbox.
Stuart is updating the team about how the Xbox Series S pricing compares to the PS5 on the day of Sony’s pricing announcement. The information the FTC is pointing to in this email is redacted, so it’s not clear what pricing was discussed.
Another email two years later in 2022 is references where Spencer is updating the team about pricing moves from Sony. Stuart was discussing foreign exchange rates and probably discussing a price hike, which Microsoft eventually announced last week.
- Xbox Game Pass pricing vs. Sony.
We’re now talking about the pricing of subscriptions. The FTC references a March email between Tim Stuart, Xbox CFO, and Amy Hood, Microsoft CFO. The email discusses Sony’s subscription pricing, a “Game Pass competitor” after its announcement last year.
The email also includes a table of information and Stuart comparing Game Pass and Sony’s subscription. It’s not clear exactly what the figures are without seeing the table, but Stuart apparently says day and date games are a key differentiator for Game Pass.
- ‘Dump trucks of money.’
The FTC brings up the phrase “dump trucks of money,” as it’s questioning Tim Stuart about Microsoft spending lots of money on gaming content.
FTC: Have you ever heard the amount of money that’s been spent? Like you’ve said, dump trucks of money?
Stuart: I have a friend of work that likes to say dump trucks of money. I referred to him.
- We won’t get to hear from Nintendo today.
Steve Singer, SVP of developer relations at Nintendo, is appearing in court by video deposition. As the video contains lots of confidential information Judge Corley will view it in closed court.
Nintendo has been at the center of an ongoing battle about whether the Switch is competition to the Xbox and PlayStation.
Microsoft also signed a deal with Nintendo to bring Call of Duty to the Nintendo Switch if the Activision deal closes. We learned yesterday that this would also include a future Nintendo console, so it’s a shame we won’t hear more about Call of Duty on Switch today.
- Xbox console market share time.
The FTC is questioning Tim Stuart about console market share from April 2022. A confidential document share excludes Nintendo Switch and Xbox One / PS4 consoles. It also measures just the US alone. Tim Stuart is asked about Japanese markets, as the data doesn’t include these markets. “The data is not that reliable,” for other markets, argues Stuart.
- Project Denali.
We’ve seen references to Project Denali in the exhibits list, and now the FTC begins by questioning Tim Stuart, Xbox CFO, who confirms Project Denali is the codename for the Activision Blizzard deal.
The FTC continues to question Stuart around whether his team has done any financial analysis on the Sony agreement for Call of Duty or the Nintendo and Nvidia + other cloud deals. Stuart confirms they have not done financial analysis of the effects of the deals.
- The CMA tried and failed to push Microsoft’s UK appeal back.
The Competitions and Markets Authority (CMA) in the UK filed to try and delay Microsoft’s appeal of its Activision Blizzard acquisition decision yesterday. The Competition Appeal Tribunal (CAT) immediately responded with a no, so the hearing will continue on July 28th. The CMA was trying to push it all the way back to October, and the CAT ruled this would be “contrary to justice and fairness.” The timing comes curiously right in the middle of this FTC case.
- Xbox CFO Tim Stuart is taking the stand.
We’ve heard Tim Stuart referenced in a lot of internal emails over this five-day hearing and now we’re going to get to hear from him directly. The Xbox CFO is responsible for managing the finances of Microsoft’s gaming business, so expect to hear a lot of questions around the business side and perhaps why Microsoft is increasing Xbox Game Pass prices.
- Microsoft CFO Amy Hood is not taking the stand.
The FTC has decided not to question Amy Hood, Microsoft’s CFO.
Microsoft has already submitted a written declaration for Hood where she says Microsoft wants to increase Xbox operating margins to match other Microsoft businesses. She also says Microsoft never assessed removing Call of Duty from PlayStation and that the Activision deal has to immediately make money.