FTC vs Microsoft - Day 1 Recap

Day 1 - June 22nd, 2023 Highlights

The first day of the FTC v. Microsoft hearing sparked a heated battle between two gaming giants: PlayStation and Xbox. As the case unfolded, it became apparent that the FTC, seemingly donning the mantle of Sony, the unrivaled leader in the gaming world, was pitted against Microsoft's Xbox, a brand still striving to recover from the infamous Xbox One fiasco nearly a decade ago.

FTC's Opening Statement

According to James Weingarten, the counsel for the FTC, Activision is responsible for developing some of the most significant video games in the United States, including popular titles like Call of Duty, Diablo, and Overwatch. Weingarten emphasizes that both Microsoft and its competitors require high-quality content, referred to as triple-A, for their gaming consoles. As a result, they not only license Activision's content but also pay a premium for it. Weingarten further asserts that the evidence to be presented by the FTC in the coming days represents only a fraction of the total evidence that raises legitimate concerns regarding anti-competitive practices.

The Nintendo Switch Delimma

Microsoft seeks to broaden it by incorporating the Nintendo Switch, while the FTC aims to restrict it solely to Xbox and PlayStation. FTC lawyer James Weingarten asserts that Microsoft consistently excludes the Switch when considering the ninth-generation market. Furthermore, he disregards gaming PCs as they differ significantly in terms of price and other factors. 

It's hard to suppress a chuckle when considering the FTC's stance that the Nintendo Switch is not a contender in the world of gaming consoles, despite any internal assertions made by Microsoft.

 

Microsoft's Opening Statement

Beth Wilkinson, representing Microsoft as their counsel, presents the initial arguments on behalf of the Xbox maker. Microsoft asserts that Sony has held the dominant position in the console market and seeks to safeguard its revenue streams. Wilkinson emphasizes that the acquisition will enable the cloud-based streaming of Call of Duty and its availability through a subscription service.

Microsoft Claims Activision Deal is About Mobile Gaming

According to Beth Wilkinson, counsel for Microsoft, there is a significant shift towards mobile gaming. Microsoft highlights the revenue distribution in the gaming market, revealing that a substantial 94 percent of players engage with games on mobile phones within the expansive $145B mobile gaming market. Wilkinson asserts that Microsoft's acquisition of Activision presents an opportunity to establish a strong mobile presence, leveraging popular titles such as Candy Crush, Call of Duty, and others.

Jim Ryan Shrugged Off Xbox Exclusivity Fears

Within moments of the FTC v. Microsoft hearing, a stunning revelation emerged. A recently unsealed email revealed that Jim Ryan, the head of Sony's PlayStation division, believed that Microsoft's proposed acquisition of Activision Blizzard was not driven by the intention to make games exclusive to Xbox. The Microsoft counsel presented an exchange between Ryan and Chris Deering, the former CEO of Sony Computer Entertainment, discussing the announcement of the deal last year.    

Ryan's email stated

It is not an exclusivity play at all. They're thinking bigger than that, and they have the financial resources to make such moves. I have had extensive conversations with both Phil [Spencer] and Bobby [Kotick] over the past day, and I'm confident that we will continue to see Call of Duty on PlayStation for many years to come.

No idea, why the case even continued after the above email revelation!

First Witness: FTC Summons Matt Booty

Matt Booty - The Head of Xbox Game Studios was summoned by FTC as the first witness. 

FTC asked Booty about Call of Duty on Nintendo Switch. According to Matt Booty, adapting games for Nintendo platforms would require adjustments to graphics and assets. This would entail reducing frame rates and simplifying elements. In contrast, the FTC contends that such adaptations would essentially result in a distinct version of the game, emphasizing that the Nintendo Switch should be considered separate from the "high-performance" consoles of Xbox and PlayStation.

Booty vehemently expressed his objection to Nvidia including games on GeForce Now without Microsoft's authorization, stating, "No effing way." In a 2019 email, Booty clarified that Microsoft had no intention of allowing its first-party intellectual property (IP) to appear on competing streaming or subscription services.

Later, in a March 2021 email to Xbox chief Phil Spencer, Booty recommended that Bethesda's games be removed from Nvidia's GeForce Now shortly after Microsoft's acquisition. He explained, 

We have pulled all Xbox Game Studios titles from GeForce Now, so as to not compete with xCloud 

Recently, Microsoft forged a partnership with Nvidia to bring its Xbox PC games to GeForce Now as an attempt to appease regulators like the FTC.
    
When asked about his motivation to remove Microsoft's games from GeForce Now previously, Booty expressed frustration with Nvidia, stating:

I was frustrated at the process. We did not have clear deals in place with Nvidia for the use of our IP. They were putting games onto our service in some cases without our permission.

According to Matt Booty, his perspective on keeping Xbox content exclusive has evolved since his emphatic statement in 2019. Booty's explanation, in response to a query from Judge Corley, offers insights into the streaming wars:

I think we've observed that while content is undoubtedly crucial for a strategy, it doesn't necessarily provide a long-lasting advantage. New entrants can enter the field and swiftly build up their content libraries.

To illustrate his point, Booty cites the competition between Disney Plus and Netflix, highlighting how Disney managed to rapidly expand its library. This serves as a way to downplay the notion that Microsoft would make Activision Blizzard games exclusive if the acquisition deal is finalized.   

Pete Hines Took the Stand

In the FTC v. Microsoft case, Bethesda executive Pete Hines testified about Microsoft's acquisition of ZeniMax and the subsequent exclusivity of games on Xbox. The FTC questioned Hines about Redfall, suggesting that it became exclusive to Xbox after Microsoft acquired its developer, Arkane. Hines acknowledged that opinions on Redfall's classification as a AAA game may differ.
    
Hines addressed an interview where he apologized to PS5 players for the exclusivity of Starfield to Xbox. The FTC used this as evidence of anti-competitive practices. However, under friendly questioning, Hines argued that exclusivity streamlines game development. He stated that Starfield would not have a September 1st release if it were also available on PlayStation.
    
Hines confirmed the exclusivity of the upcoming Indiana Jones game for Xbox and PC, emphasizing its availability on Xbox Game Pass from day one. Microsoft aimed to differentiate games like Starfield and Redfall from Activision's Call of Duty to counter the notion of direct competition.
    
Hines acknowledged that Redfall did not meet the same level of quality as previous Arkane releases, a sentiment also recognized by Phil Spencer, Microsoft's executive.
 

Sarah Bond Took the Stand

During the FTC v. Microsoft case, Sarah Bond, head of Xbox creator experience, testified about various aspects of Xbox's operations.
    
She explained the premise of the Diablo franchise, emphasizing its appeal to a wide range of players, including older audiences. Bond also discussed Xbox Game Pass, highlighting its role in facilitating game discovery and introducing players to new genres.
    
Regarding Call of Duty's availability on Xbox consoles, Bond revealed that Microsoft negotiated a new revenue share deal with Activision to ensure its simultaneous release on both Xbox and PlayStation.
    
Bond touched upon Microsoft's interactions with Valve for a long-term deal on Steam, noting Valve's preference for flexibility in content agreements.
    
In terms of Xbox Cloud Gaming, Bond stated that Microsoft had previously considered a dedicated version separate from Xbox Game Pass Ultimate, but the company changed its plans due to regulatory concerns.

Summary

The first day of the trial brought about intriguing developments. The FTC's dismissal of the Nintendo Switch as a gaming console raises questions about their focus on Microsoft vs. Sony. While Sony's CEO himself downplayed concerns about deal being about Xbox exclusivity, one can't help but speculate about the motives driving the FTC to engage Microsoft in this battle.

Microsoft's position as a potential gaming monopoly is questionable, especially with certain Japanese gaming genres predominantly locked into Nintendo's Switch and Sony's PlayStation, effectively excluding Microsoft from Japan. The outcome of this trial will determine if the judge sides with the FTC, but Microsoft faces an uphill battle.

Interestingly, one can't help but wonder if this trial will ultimately pave the way for an FTC vs. Sony showdown, tackling similar allegations faced by Microsoft. Such a spectacle would be truly epic, shaping the future landscape of the gaming industry.