Xbox FTC Trial Day 2: In Which the Head of Xbox Explains Mergers to the FTC
Today's testimonies in the FTC's legal battle to press pause on Xbox's merger with Activision were bookended by a closed session with Microsoft senior finance director Jamie Lawver and a brief questioning of Google Stadia product director Dov Zimring. But the real meat of today was the Phil Spencer show.
The suit-clad head of Xbox kept steady throughout a lengthy questioning by the FTC before laying out, in cross-examination, a clear map of Xbox's mobile-focused strategy for acquiring Activision. When Microsoft wrapped up its inquiries, Spencer's stint at the front of the court was concluded by a rather awkward line of questioning during which he found himself patiently explaining to FTC lawyer James Weingarten how, exactly, money works in acquisitions.
Relevant Markets Revisited
Once again, the FTC spent a solid portion of time focused on defining the "relevant markets" as part of its job in this affair is to prove that Microsoft acquiring Activision would "substantially lessen competition" in a "relevant market." For this specific case, the FTC has put forth significant efforts on a couple of very specific relevant markets, one of which is high-end consoles - a.k.a., PlayStation 5 and Xbox Series X and S...but not Nintendo Switch. Xbox has argued that it's in "third place" behind both PlayStation and Switch, and an Activision acquisition would help bolster its weaker market position rather than harm competition. But if the FTC can remove the Switch as a competitor in its market definition, then the scales tip more in Xbox's favor, and it can more reasonably make the argument that Xbox could hurt competition.
So, naturally, we heard a lot of back and forth over the Nintendo Switch today throughout multiple rounds of Spencer's time on the witness stand. The FTC brought forward multiple internal Xbox documents demonstrating market share between PS5 and Xbox Series consoles as Gen 9, but seemed to exclude the Switch in an effort to prove that even internally, Microsoft does not consider the Switch a serious competitor.
Spencer's argument, which gained strength once Microsoft counsel stepped up to counter-examine him, is that Microsoft uses a number of internal metrics to gauge success, some of which include Switch and some of which don't - it just depends on what data they are looking for. Microsoft counsel busted out its own chart with all three platform holders on it to prove it - a chart Spencer supposedly receives an updated version of every single week. Spencer was given the opportunity to hail Switch as a strong and uniquely designed competitor - the strongest of the three consoles in terms of unit sales, even. And when he was passed back to the FTC for a final round, the FTC took the rather strange tactic of pointing out repeatedly that the Switch was listed last in Microsoft's report, a move which did not seem to sufficiently prove anything of relevance.
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A similar discussion was had regarding another "relevant market" definition, but this time with the FTC trying to demonstrate that the deal would be anti-competitive in the United States specifically because of Xbox's comparatively larger market share (as opposed to its weaker position in Asia and Europe). Meanwhile, Microsoft gave Spencer the opportunity to argue that no one - neither console makers nor developers - is operating in a regional vacuum, but is designing everything with a global market in mind. Neither party spent much time on this specific line of questioning.
But we did to hear a delightful response from Spencer when he was asked by Weingarten if Xbox had "lost the console wars."
“As the console wars is a social construct, with the community, I would never want to count our community out, they’re big fans," Spencer replied. "If you look at our market share in the console space over the last 20+ years, we’re in third place. We’ve remained in third place for quite a while.”
Content Is King
Microsoft's cross-examination, on the other hand, was far more cohesive. With Spencer more comfortable speaking at length under Microsoft counsel Beth Wilkinson's questioning, they were able to lay out a coherent guide to Xbox's attempted strategy in acquiring Activision Blizzard. The two covered all of Xbox's greatest hit arguments here, including why it would make no sense financially for a developer to purposefully degrade a video game on another platform ("like designing a movie for Omaha and making it worse for New York City"), and why pulling Call of Duty from PlayStation would cause "irreperable harm" to the brand in the eyes of gamers.
One especially interesting segment, though, was Spencer's outline of Xbox's mobile strategy. Much of this we've heard before in filings earlier this year, but here Spencer had the opportunity to dig in deep on how Activision would be a balm to Xbox's near-absence from the largest gaming market. He began, though, by what was almost an apologia for xCloud, which he explained had been a strategy to help Xbox compete in the mobile market. A strategy, he admits, that didn't work out so well thanks to issues such as latency, screen size, and controller support. “Turns out there are a lot of barriers to console games being displayed on a phone screen," Spencer said.
“ "Turns out there are a lot of barriers to console games being displayed on a phone screen.
“Our solution here is not customer led really," he wrote in a 2019 email. "It’s led by what we have and a hope. I don’t like this but I’m not smart enough to come up with anything else. If I ask mobile gamers what they want, they won’t tell me that it’s to play Halo on their phone with a Bluetooth connection to an Xbox controller. That’s probably as far from what they want to do on their phone as anything. They also don’t pay for any games, all the mobile games are F2P. So even the business model around our games that mobile players don’t want is wrong."
Spencer confirmed that Xbox tried to acquire Zynga to solve this problem, but realized they needed something even bigger. Then, in November of 2021, the Activision opportunity arose. As the biggest publisher of mobile content, Activision - largely via mobile subsidiary King - had the properties and the development chops to make big enough games that it could help Xbox realize its ambitions of breaking into the massive mobile market and becoming a real competitor. And it would do that not just through publishing mobile games, but through building its own mobile storefront:
“We believe there is an opportunity to create a gaming storefront on mobile phones for Apple and Google phones where people can come to find games to play, and a storefront that would really tailor toward players on Google and Apple’s platform," Spencer said. "Now Google and Apple will fight us to do this. They don’t openly allow other storefronts on the largest gaming platform. So as we talked about, we started with this strategy of xCloud, maybe through the cloud, outside of their store, we’d be able to deliver content to them. This is an approach of having a native storefront on a phone where people could come to find our games and third-party games.”
With Activision's games such as Call of Duty mobile and Candy Crush in its chamber, Xbox could drive its audience toward its mobile storefront and establish a meaningful presence on both mobile platforms, something it's not able to do with its current portfolio by any stretch. This explains Xbox's specter-like presence in the backdrop of the Epic v. Apple trial over Apple's walled garden a few years ago, and could be a harbinger of more, similar disputes to come should the deal be approved.
The FTC Silenced
Throughout the day, the FTC introduced a number of questions that seemed to indicate misunderstandings of how the gaming business worked. While going back and forth with Spencer on why Minecraft had not yet been optimized for PS5, for instance, Weingarten seemed oddly focused about its lack of presence on PS Now or PS+, while Spencer evenly pointed out that Sony had never made an offer for the game to be on that service, and it wasn't his job to dictate what content Sony had on its own subscriptions. Later, Weingarten repeated questions about a specific conversation Spencer might have had with Zenimax's James Leder in fall of 2021 about game exclusivity - a conversation Spencer was able to easily enough claim he didn't remember specific of, given that it happened two years ago and that he discusses the subject with his colleagues all the time.
Xbox CEO Phil Spencer heads to the courthouse. Image credit: Justin Sullivan/Getty Images
And at another point, Weingarten questioned why Microsoft could afford a $70 billion acquisition but couldn't afford to pay studios like Square Enix to make games like Final Fantasy exclusive to Xbox instead, which led to a truly fascinating exchange where the head of Xbox explained how the financials of acquisition works to an FTC lawyer.
But things really got silly thanks to a power move by Microsoft's lawyers during the cross-examination in giving Spencer the opportunity to, under oath, commit to keeping Call of Duty on PlayStation.
"I would raise my hand. I will do whatever it takes," he said. "We have no plan. I'm making a commitment standing here that we will not pull Call of Duty - it is my testimony - from PlayStation."
It was a striking moment that stood out even after Spencer's other repeated public pledges to do just that, but what was really curious was what followed when Weingarten returned to question Spencer further. Weingarten asked Spencer if he could still make that promise without looking at any of the "terms" involved. Spencer replied that this was not necessary - Xbox has shipped many games on PlayStation, he's confident they can do it. Weingarten pressed harder.
“Can you swear under oath that you can promise that you’ll ship COD on all the future versions of PlayStation, for ten years, without knowing what the terms are?"
“ "I'm making a commitment standing here that we will not pull Call of Duty... from PlayStation.
The two went back and forth, with Spencer noting that it's possible Sony changes the terms on Xbox in a way that makes shipping a game impossible, with the unspoken conclusion that this would be Sony's fault, not Xbox's. Weingarten clapped back, pointing out that in the ten-year agreement Xbox sent Sony, Sony asked for "significant commitments beyond the standard shipping of the game" that had caused the promise to remain unsigned, in limbo. Spencer said the deal was extraordinary, but was committed to bringing Call of Duty to PlayStation even without that specific contract signed.
Weingarten went on. Would Spencer make the same promise for all Activision content?
No, Spencer replied, that would not make sense, Activison has games currently that are on mobile or PC-only, like World of Warcraft.
What about Diablo? Weingarten went on. Can he commit to that?
It was at this point that Microsoft stepped in with an objection, and the judge urged proceedings on. But Weingarten came back to the same argument later, asking if Spencer would make the same commitment to Sony's cloud gaming service, at which point the judge actively cut him off, clearly done with the discussion.
How It All Played Out
It's admittedly difficult to imagine how someone unfamiliar with the gaming industry (as Judge Jacqueline Scott Corley self-admittedly is) might have felt about today. But from the inside, the FTC came out looking a bit ridiculous. Its lawyers repeatedly seemed to be unaware about basic business principles involved in bringing games to different platforms, and Spencer himself was able to hold up well under lengthy questioning. Microsoft, meanwhile, was at last given ample opportunity to outline the real reasons it wants Activision in front of a US judge, as well as counter a number of (it claims) non-reasons, such as making Call of Duty exclusive. And Microsoft still has multiple witnesses on the way next week when the trial resumes Tuesday.
It is still critical to remember that the FTC's job isn't to prove the deal is anti-competitive. At least not right now. It's just trying to pause the deal long enough to take things to court against in August as it planned, rather than let the deal pass in July and have to fight to undo it down the line. With that in mind, Judge Corley outside perspective on the industry, and in light of recent US sleight of antitrust crackdowns, it's still not clear which way the cards will fall, especially with both parties having the weekend to regroup. Even analysts aren't fully convinced one way or another of the outcome, and it sounds like the answer won't be here until sometime after the July 4th weekend.
In the meantime, day by day, you can check out our daily roundups right here on IGN for updates on everything happening, as it happens.
Rebekah Valentine is a senior reporter for IGN. You can find her on Twitter @duckvalentine.
Source: IGN
