The litigation between the FTC and Microsoft has become the main bone of contention in determining the future of the proposed acquisition of Activision Blizzard. It is also an opportunity to discover industry secrets.
Microsoft’s proposed $68.7 billion takeover of Activision Blizzard is causing trouble in the UK and US. On June 12, 2023, the FTC (Federal Trade Commission), which is responsible for the competition in the United States, requested an injunction in federal court. The process brings with it the future of the takeover project. It also helps lift the veil on certain video game industry mysteries.
What is this process for?
The lawsuit between the FTC and Microsoft in federal court is an expedited trial to determine whether it is necessary to prevent Microsoft from acquiring Activision Blizzard pending judgment in another trial, the administrative court proceedings, which should be completed in 2024. The competition regulator in the United States ruled in December 2022 that the proposed acquisition should be blocked and filed a lawsuit in its administrative court, scheduled to open in August.
The acquisition deal between Activision Blizzard and Microsoft expires on July 18, 2023, and despite the UK lockdown, the two companies have floated the idea of completing the merger before then. Perplexed, the FTC sought an injunction to freeze the acquisition.
In hearings lasting several days, the FTC therefore tried to prove that Microsoft was dishonest and could make future Activision Blizzard games exclusive to its ecosystem or degrade the experience on competing consoles. She also wanted to prove that developing Call of Duty for Switch was going to be difficult. Finally, the FTC wanted to highlight the future importance of cloud gaming and the weight Microsoft would have in this market with its acquisition of Activision Blizzard.
Conversely, Microsoft’s strategy was to show that this acquisition would be a good thing for consumers, by bringing Call of Duty to more platforms than it has today, such as the Switch, and bringing Activision Blizzard franchises to Xbox Game Pass become. The company has also highlighted the mobile market as a key interest for acquiring Activision Blizzard, specifically publishers of Candy Crush and Call of Duty Mobile.
- If the FTC wins: Microsoft no longer has the right to buy Activision Blizzard until the end of the first test, scheduled for 2024. The company could abandon its project.
- If Microsoft wins: The FTC could drop the main suit and only the UK would remain an issue for the project. Microsoft could choose to acquire Activision Blizzard, ignoring the UK’s decision.
The secrets are revealed
Whether through the confidential documents from Sony and Microsoft that served as evidence during the trial, or through the various statements made by industry executives, the trial has given rise to several revelations.
- Before Activision Blizzard, Microsoft considered buying many studios, including Sega, Bungie, Crytek, Zynga or even Nintendo. Sega has officially stated that a buyout was out of the question at the time.
- Microsoft has considered bringing Xbox Game Studio games (Halo, Gears, Forza, etc.) to PlayStation and Nintendo Switch.
- Activision Blizzard forced Microsoft into action increase the income split from 70/30 to 80/20. If negotiations had failed, Call of Duty could have become a PS5 exclusive.
- Developed by MachineGames, the Indiana Jones game will be available exclusively for Xbox and PC, while the original deal signed with Disney was for cross-platform play.
- The game Elder Scrolls 6 is only expected in 5 years and could be released on the next generation of consoles. Microsoft doubts a PS6 release.
- Microsoft was working on an Xbox Game Pass plan specifically for cloud gaming.
- According to Microsoft, The next generation of PlayStation 6 and Xbox consoles would appear in 2028before the end of the 10-year contract Sony was offered for Call of Duty.
- Microsoft wants to migrate Windows to the cloud and switch to ARM.
- Microsoft has considered buying Square Enix to launch an Xbox Game Pass for mobile gaming.
- By 2030, Microsoft wants to become the market leader in the video game market and thus double its sales.
- The development of The Last of Us Part 2 cost $220 million and that of Horizon Forbidden West, $212 million.
- The IO Interactive Studio (Hitman, 007) worked in 2021 on an Xbox exclusive game called Project Dragon and published by Microsoft.
- An internal email from Microsoft reveals that the company paid $117 million to acquire Ninja Theory in 2018
- An internal email between Phil Spencer and Tim Stuart reveals that Microsoft is part of the Xbox Series
- A document from Microsoft lawyers says the company sees itself as a loser in the “console war” against Nintendo and Sony, echoing a May 2023 statement by Phil Spencer.
- Microsoft estimates the retail price of the PlayStation Project Q at $300.
The summary of the process
The lawsuit between the FTC and Microsoft included testimony from several industry executives. Here is a summary of the arguments made during each statement.
- Xbox Game Studio boss Matt Booty has admitted that porting Call of Duty to Switch will involve compromises. He had to explain in internal emails about the decision to make new Bethesda games exclusive and withhold Nvidia GeForce Now Bethesda games. In a 2019 email, he discussed the idea of putting Sony out of business by buying content for Xbox Game Pass. At the time, Microsoft feared the idea that Tencent, Google, Amazon or Sony would become a “Disney of video games”. Matt Booty explains that Microsoft’s strategy has changed since then.
- Phil Spencer, the head of Microsoft Gaming (Xbox), has sworn under oath that Call of Duty will continue to be offered on the PS5 and future PlayStation consoles. He reveals that the Bethesda Zenimax acquisition was prompted by fears Starfield could become a PS5 exclusive. An internal email from 2019 reveals how Xbox was considering becoming a mobile game studio and how the xCloud strategy serves Microsoft’s interests without fulfilling a consumer need. He pointed out that Xbox is an independent arm of Microsoft that should be profitable. He has to explain himself every month to Amy Hood, Microsoft’s CFO, about Microsoft Gaming’s finances. A 2021 email reveals that Phil Spencer is in favor of releasing Fallout 76 on PlayStation Now (now PlayStation Plus Extra) to boost the game’s popularity.
- Bethesda boss Pete Hines is clearly unhappy with Microsoft’s stance since announcing its acquisition of Activision Blizzard. One email from him vehemently questions why games from his studios are exclusive to Xbox while Activision Blizzard isn’t.
- Jim Ryan, the head of Sony Interactive Entertainment (PlayStation), states in an internal email from January 2022 that he is not worried about Xbox’s acquisition of Activision Blizzard: “Everything will be fine.” We will be more than going well.” From August 2022, Negotiations with Xbox regarding Call of Duty have failed and the company worries even more, to the point of reporting it to the authorities. He admits that the relationship with Activision would deteriorate in the event of a takeover, and that PlayStation would no longer be able to communicate the details of its next console with a subsidiary of its direct competitor. According to Jim Ryan, cloud gaming will become more important between 2025 and 2035. He believes Xbox Game Pass is destroying the value of games and that publishers are unhappy with the service. He acknowledged that Starfield’s move to an Xbox exclusivity was not anti-competitive. It pushes the idea that Microsoft could still release Call of Duty on PlayStation, but with a downgraded or less powerful version of the game. or Diablo IV.
- Sarah Bond, who is responsible for developer relations and the Xbox ecosystem, acknowledged that cloud gaming usage is very limited at the moment. Gamers primarily use it to try out a downloaded console game. The use on smartphones defended by Microsoft would actually be minimal.
- The idea of making Call of Duty exclusive to Xbox consoles was never discussed with Microsoft’s chief financial officer, Amy Hood, or the group’s board of directors.
- According to the FTC, the 10-year contracts between Microsoft and other video game vendors such as Nintendo or Nvidia contain flaws that could allow Microsoft to default on its commitments.
- Activision Blizzard boss Bobby Kotick stated that he doesn’t endorse Xbox Game Pass for games from his studios, which agrees with Microsoft’s reasoning. The latter actually sells the idea that Activision games won’t be available in Xbox Game Pass without the buyout. He regretted the absence of Call of Duty on Nintendo Switch and discussed the game’s development on Nintendo’s next console. He, like Microsoft, rejected the idea of releasing a toned down version of Call of Duty, stating that it would damage the brand image of the game and the studio with 100 million monthly active players on PlayStation.
- Microsoft CEO Satya Nadella stated that he doesn’t like exclusives in the console or software market and questioned Sony PlayStation on the matter.
- The testimony of Phil Eisler, head of Nvidia GeForce Now, reminded that Xbox Cloud Gaming’s competitor has supported the takeover project since signing the contract with Microsoft.
- Dov Zimring was one of the Google Stadia managers. It hints at the end of the service, which would be due in part to the lack of content on the platform. A way for the FTC to demonstrate how difficult it is even for a giant like Google to find a place when certain games are not offered on the platform. Additionally, it ties into Google’s infrastructure use of GNU/Linux, which complicates game ports, as an alternative to Windows, which would have “doubled the bill” for the company. We recall Microsoft’s strength in the sector thanks to its PC operating system.
- The testimony of Tim Stuart, Microsoft Gaming’s Chief Financial Officer, undoubtedly allowed the FTC to gain points in court. A 2020 meeting revealed that Microsoft wants its content to be “first, best, or best possible” on its own platforms. This plays with the idea of an expanded version of a game on Xbox rather than PlayStation. An exchange with Phil Spencer reveals that Microsoft “wants to say publicly that all Bethesda games will be exclusive from now on,” with Spencer recalling that “we can’t say that.” Several exchanges are revealing Microsoft’s internal thinking about moving from one game to post-acquisition exclusivity and the company’s ability to take a hit in revenue by cutting off a platform.
- Canada’s competition authority sent a letter to the judge in support of the US FTC on the final day of the hearing.
The sticking points
Here are the elements of the proposed acquisition that sparked debate between the FTC and Microsoft.
- The FTC believes that Call of Duty is at the heart of the war, a unique game that cannot easily be replaced in the video game market. The title has been compared to Bethesda’s Elder Scrolls, but for the FTC, Call of Duty is still a category up. Much of the debate revolves around Call of Duty’s ability to migrate players from one console to another in the event of an exclusivity.
- The FTC finds that Microsoft’s contracts with Nintendo and cloud gaming services are insufficient to protect consumer interests. Microsoft believes its contracts help dispel any doubts about Call of Duty and that the company would have no financial interest in making the game exclusive to PlayStation. The judge reminded the FTC that Nvidia supported the acquisition despite being competitors to Microsoft.
- The FTC worries that the market will shift too much towards video game subscription and the industry will become a duopoly between Xbox Game Pass and PlayStation Plus.
- Another focus of the debate is the question of competition from Nintendo. The Japanese manufacturer offers a console without Call of Duty and with it has success that goes in the direction of Microsoft. According to the FTC, there is a high-performance console market that only includes Xbox and PlayStation. The judge wonders about the presence of the Xbox Series S for 299 euros in this market where the Nintendo Switch is sold for the same price. Microsoft admits the price of its console was taken into account, according to Nintendo.
When is the verdict?
The negotiations took place from June 22 to 29, 2023. The verdict is now in the hands of the federal judge. The verdict is expected to be announced in the week of July 3-7, 2023. The verdict will be confidential, but we can expect to know the winner through leaks.
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