Jun 26, 2023 - Technology

Trial highlights dueling views of Microsoft's gaming operation

Microsoft's Phil Spencer entering federal court in San Francisco on Friday. Photo: Justin Sullivan/Getty Images

Two very different versions of Microsoft’s gaming division were described in court last week during ongoing hearings in the Federal Trade Commission’s attempt to block Microsoft’s $69 billion bid to buy Activision Blizzard.

Why it matters: Xbox’s public reputation, at times seemingly too complimentary of competitors, too frank about its struggles to be true, is getting tested by evidence and aggressive FTC questioning.

Microsoft's take on Microsoft is of a company whose gaming team is trying to expand the market by playing nice even with traditional rivals, producing games for as many systems, including PlayStation, as possible, with some limits.

The FTC’s take on Microsoft is that it talks nice publicly but has different plans in mind and is prepared to use the company’s war chest to tolerate short-term losses to squeeze rivals.

What they're saying: "We do not model our success at the sole expense of other platforms,” Microsoft’s longtime gaming chief Phil Spencer said during more than two hours of testimony in federal court in San Francisco.

  • Microsoft has a “multifaceted” relationship with longtime rival Sony PlayStation, Spencer said. He described productive interactions shipping games to PlayStation while acknowledging that Sony makes deals to keep games like Final Fantasy XVI off Xbox and is trying to “reduce Xbox’s survival in the market.”
  • Microsoft’s gaming team “runs as a standalone profit-and-loss business inside of Microsoft,” Spencer said, and is expected to be profitable. “There's no part of our business where I get to lose money over time.”
  • Microsoft upper management’s need for better results than Xbox’s perpetual third-place finish behind Sony and Nintendo has led to a mobile push. This was first through mobile game development (“limited success”) and streaming console games to phones over the cloud (not widely adopted).
  • Then came plans to buy a company with mobile strength. Microsoft considered Zynga, Spencer said, but then zeroed in on Activision Blizzard, the publisher of the massive Call of Duty Mobile and Candy Crush.

The other side: The FTC had no definitive proof that Microsoft seeks to squash rivals but pointed to internal documents to support its arguments that Microsoft control of Activision would, among other things, lead to Call of Duty getting pulled from PlayStation, which the agency says would harm consumers.

  • FTC lawyer James Weingarten cited a 2019 chat in which Spencer agreed with an idea to keep then-upcoming Minecraft Dungeons off non-Xbox/PC platforms (but the game then did launch on non-Xbox/PC platforms).
  • Spencer said Microsoft’s deal model for the Activision bid didn’t even account for pulling Call of Duty from PlayStation. But Weingarten said that Microsoft’s deal model for ZeniMax didn’t call for exclusive games either, yet some went exclusive.
  • Spencer confirmed to Weingarten that he approved a renegotiation of ZeniMax’s deal with license-holder Disney regarding a still-upcoming Indiana Jones game to revisit platforms, thereby nixing a PlayStation version. Spencer justified it by noting that Disney licensed a Spider-Man line of games exclusively to PlayStation.

The intrigue: In an example that might support either side's narrative, Spencer said Microsoft bought ZeniMax in 2021 to keep Starfield from going PlayStation-exclusive.

  • After Sony paid then-independent mega-publisher ZeniMax to ship the games Deathloop and Ghostwire Tokyo on PlayStation and not Xbox, Microsoft heard it wanted to do the same with marquee game Starfield and decided to solve for that by buying ZeniMax for $7.5 billion.
  • “With a competitor who's paying third parties to skip our platform, we've felt it's necessary for us to secure ownership of more content, so we can have more input into that content on our platform and in our subscription," Spencer said. "ZeniMax is a great example that.”

The pledge: In a dramatic moment Friday, Spencer told Judge Jacqueline Scott Corley, who will rule on the preliminary injunction, that he vowed to keep releasing Call of Duty on PlayStation.

  • “You're testifying under oath that you will do that?” the judge asked.
  • “Absolutely,” Spencer said. “I would raise my right hand; I would do whatever it takes.”
  • On cross-examination, Weingarten questioned Spencer about whether he could make a commitment like that and bind Microsoft to pledges. The FTC lawyer later asked Spencer if he’d make the same pledge under oath for keeping Activision’s games on cloud services. But the judge interjected: "I don't think that's it. I'm going to cut off the question here."

What’s next: Witness testimony resumes Tuesday; closing arguments are scheduled for Thursday.

  • Set to testify: Microsoft CEO Satya Nadella, Activision Blizzard CEO Bobby Kotick and executives from Nvidia and Nintendo.

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