Sony’s fears about Microsoft’s Activision Blizzard deal kicked into gear in August 2022 after Xbox chief Phil Spencer sent PlayStation chief Jim Ryan a list of Activision games Microsoft would be willing to keep on PlayStation. Overwatch was on that list, but Overwatch 2 was not. According to Ryan, this “sent alarm bells ringing.”
On day three of FTC v. Microsoft, we heard a lot more about Sony’s reaction months after Microsoft’s industry-changing announcement of its proposed Activision Blizzard deal. Ryan’s prerecorded video deposition also offered a defense of PlayStation exclusives, Sony’s fears about sharing PS6 information with Microsoft, and why Sony is hedging against an Xbox Game Pass that Ryan describes as “value destructive” to publishers.
Oh, and if you’re really into math and quantitative analysis, then maybe you can help decipher some of the testimony from Robin Lee, PhD, the FTC’s economic advisor. It was a big part of day three that I think left everyone feeling a little dazed and confused.
Xbox is for shooting things
We started off day three with a warning from Judge Jacqueline Scott Corley about people livestreaming witness testimony to YouTube and other sites. It’s strictly prohibited, and Judge Corley warned YouTubers are jeopardizing the ability for potentially all US court proceedings to be officially streamed to the public via Zoom. “You are welcome to live blog; that is fine, but no recording or streaming.”
The court only has a Zoom license for 1,000 people to listen in, which, in this case, regularly hits capacity. That’s probably the main reason people are streaming the hearing on YouTube: to provide better access for people who want to listen in. But it’s 2023, and courts clearly aren’t prepared for the thousands of gamers that want to listen to this hearing.
With that administrative warning out of the way, we moved straight into the video deposition of PlayStation chief Jim Ryan. It ran for around 70 minutes and, at times, jumped around due to parts being edited out for confidentiality reasons.
Ryan started off by describing why Xbox games resonate better in the US than outside the US:
“Many of their [Xbox] games involve an element of shooting, and many of their games involve moments of online multiplayer. Both of which typically are more popular in the US than they are outside of the US.”
This description of Xbox games fed straight into the FTC’s argument that the Nintendo Switch is different from Xbox and PlayStation and that it’s all about the close competition in the US market between Sony and Microsoft. The FTC and Microsoft have been battling over three days of testimony about whether the Nintendo Switch is a game console and whether it competes with the PlayStation and Xbox. Ryan offered his take on the Switch:
“We consider Nintendo to participate in a different market segment to Xbox and PlayStation. Nintendo’s hardware technology is of a much less sophisticated nature than PlayStation or Xbox. Its hardware typically retails for a cheaper price, and its audience is aimed rather younger.”
We didn’t spend much time on the Nintendo Switch arguments during Ryan’s testimony, but don’t worry: the FTC and Microsoft started arguing about it again while questioning the FTC’s economic expert, Robin Lee. Sigh.
Next up, Ryan offered a brief defense of why it’s beneficial to have third-party exclusives on PlayStation. “The development effort required to make that game reduces,” said Ryan, because game studios can streamline development. That’s similar to what Bethesda’s Pete Hines said on day one about Starfield being exclusive. But the FTC has been arguing that exclusives are bad for competition and that Microsoft purchased Bethesda and kept games like Redfall, Starfield, and the upcoming Indiana Jones game off PS5. Ryan expected these games to remain on PlayStation after Microsoft acquired Bethesda:
“I think that pretty much every Bethesda game was multi-platform prior to the acquisition.”
Sony’s PS6 fears and Activision alarm bells
Xbox chief Phil Spencer testified last week that “Sony was reluctant to ship us PlayStation dev kits… it put us behind on our development for Minecraft on PS5.” Ryan says that Sony was wary of sharing dev kits and next-generation console information with Microsoft for their games.
Sony is wary of sharing dev kits for future consoles like the PS6 with Microsoft to build games like Minecraft or potentially Call of Duty in the future:
“We simply could not run the risk of a company that was owned by a direct competitor having access to that information.”
Sony made the decision to delay supplying PS5 dev kits to Microsoft for Minecraft:
“The development kits allow developers to have visibility and to work on the feature set that our new console will deploy. [Delaying dev kits] would typically mean a developer may bring its content to the new platform later than would otherwise be the case. The commercial risks associated with the knowledge of these feature sets leaking to our principle competitor is not something we’d rely on any contract to enforce.”
Dev kits aren’t the only thing that Sony fears with an Activision-owned Microsoft. We heard a bombshell email from PlayStation chief Jim Ryan read out in court last, revealing that he wasn’t actually worried about Call of Duty exclusivity and was “pretty sure we will continue to see Call of Duty on PlayStation for many years to come.”
Microsoft’s lawyers brought that email up again in Ryan’s deposition, highlighting how he didn’t initially have concerns about the deal and had spoken to Xbox chief Phil Spencer to seek assurances about Call of Duty in January 2022. But alarm bells started ringing at Sony in August last year.
Sony was wary of sending Microsoft PS5 dev kits. Illustration by Alex Castro / The Verge
After months of discussions and counter offers around Activision content in April and May, an August 26th email from Phil Spencer included a list of Activision games that would remain on PlayStation, and Jim Ryan wasn’t happy:
“It was not a meaningful list. This list represented a particular selection of older titles that would remain on PlayStation, for example Overwatch is on there but Overwatch 2 is not on there, the current version of the game.
It’s clear that this August email led to a breakdown in communications between Phil Spencer and Jim Ryan. Just days after it was sent, Phil Spencer told The Verge that Call of Duty would remain on PlayStation “for at least several more years beyond the current Sony contract,” an unusual offer in the gaming world. Jim Ryan wasn’t happy about Phil Spencer going public with contract negotiations.
Ryan called the offer “inadequate on many levels and failed to take account of the impact on our gamers.” He also said he “hadn’t intended to comment on what I understood to be a private business discussion, but I feel the need to set the record straight because Phil Spencer brought this into the public forum.”
Microsoft’s lawyer wanted to know when Jim Ryan first became concerned about the Activision deal, insinuating that Sony had run to regulators complaining about Call of Duty after contract discussions with Microsoft failed:
Microsoft lawyer: So you weren’t concerned in May about the transaction?
Ryan: I wouldn’t say I wasn’t concerned at all, but it was really his [Phil Spencer’s] response a few months after my email on May 26th which sent alarm bells ringing
Microsoft: That would have been on August 26th, 2022?
Microsoft: So the thing that caused you major concern was the August 26th email from Spencer?
Ryan: That was a significant factor, yes
Microsoft: Was there any other significant factor before that time?
Ryan: I wasn’t particularly happy with the January 31st proposal, but hoped it was an opening salvo
Microsoft: As of today you believe that this transaction between Microsoft and Activision would harm competition, is that right?
Ryan: I believe that this transaction is bad for competition
Microsoft: When did you come to that determination?
Ryan: I don’t think it’s possible to ascribe a particular date to it, but I think that that email of the 26th of August was an important moment
Microsoft: Did you or anyone at your direction go to regulators anywhere in the world before August 26th?
Ryan: I don’t remember. We certainly had one meeting with the CMA over the summer
Ryan didn’t have concerns about Call of Duty exclusivity or impact on PlayStation initially in a private email exchange, but he holds a different opinion now:
“I believe Microsoft intends to use Call of Duty to disadvantage PlayStation in terms of the availability or the manner in which the game is made available on PlayStation consoles and to drive PlayStation gamers to Xbox platforms, specifically Game Pass.”
Ryan then argued Microsoft is primarily a platform holder instead of a publisher. Microsoft does, however, publish Xbox games like Minecraft on PlayStation. The deposition cut back and forth here, but then we heard Ryan admitting something wasn’t necessary, presumably a special agreement like the Call of Duty one with most publishers.
In filings to regulators, Sony has maintained that it fears Microsoft could make Call of Duty exclusive to Xbox or even sabotage the PlayStation versions of the game. But Ryan does admit it’s in the interest of a publisher to provide an equal version of the game across platforms:
“Because publishers have every incentive to provide an equal gaming experience or as good a gaming experience as possible on all platforms.”
Ryan then confirms that he spoke to Activision CEO Bobby Kotick on February 21st, 2023, on the same day Microsoft, Activision, Sony, and others were meeting with EU regulators. We’d previously heard Ryan had said to Kotick, “I don’t want a new Call of Duty deal. I just want to block your merger.” Jim Ryan confirms the meeting and what he said:
“I told him [Bobby Kotick] that I thought the transaction was anti-competitive, I hoped that the regulators would do their job and block it”
Ryan says Kotick wanted to “cover himself” with an extended Call of Duty deal with Sony just in case:
“What Bobby wanted to do was cover himself by extending the marketing collaboration between Sony and Activision, in the event of the transaction not proceeding.”
Sony is hedging against a Game Pass described as “value destructive”
The FTC has been arguing that exclusive games could be anti-competitive, leaning on Microsoft’s Bethesda acquisition, where the company made Redfall and Starfield exclusive to Xbox and PC. Jim Ryan is asked if there’s anything wrong in Microsoft doing exclusives like Redfall. He says, “I don’t like it, but I fundamentally have no quarrel with it.” What about Starfield? “I don’t like it, but I don’t view it as anti-competitive.”
The deposition then moved to a Fidelity investors meeting in February 2022, months before the concerning August email. During the meeting, Ryan discussed the importance of Sony’s first-party content to fend off competition from Xbox Game Pass:
“One of the reasons why we are investing massively in first-party development and publishing is to provide us with an edge against pressure on a historic business model. Having a business model where you own elements from top to the bottom increases your ability to be self-determinant.”
Sony is clearly hedging against the threat of Xbox Game Pass disrupting its existing business model of selling exclusive triple-A games, so Microsoft’s lawyer wanted to know how Jim Ryan would run Xbox? Ryan admits it’s not in Microsoft’s best interests to make Activision games available on all platforms:
Microsoft : Do you think it would be better if Microsoft kept Activision games on PlayStation?
Ryan: Yes, I do
Microsoft: So you do believe it’s in Microsoft’s best interests to make Activision games available on multiple platforms?
Ryan: No, I don’t agree with that
Microsoft: So if you were running Xbox, would you recommend making Call of Duty and other Activision games exclusive to Xbox and PC?
Ryan: That’s a hypothetical question that I don’t wish to answer
Microsoft: So you don’t get to answer?
Ryan: I don’t have enough knowledge to answer that question
At the same meeting with investors, Ryan discussed Microsoft’s Game Pass push and the proposed Activision Blizzard acquisition. “That has driven them to make a large acquisition. I talked to all publishers, and they unanimously do not like Game Pass because it’s value destructive.” He went on to say in his deposition that “I talk to publishers all the time, and this is a very commonly held view over many years by the publishers.”
Ryan also said he was surprised at the 25 million Xbox Game Pass subscriber numbers Microsoft disclosed in January 2022, as he was “expecting a larger number given all the money they have spent.” He compared it to Sony’s 55 million PlayStation Plus subscribers at the time, and Sony went on to claim in an October filing with the Competition and Markets Authority in the UK that Microsoft has 29 million subscribers. Microsoft has not officially announced more than the 25 million figure from January 2022.
Ryan’s testimony also revealed that Xbox beat PS5 sales for three months in 2021. Sony had some shipping constraints that allowed the Xbox Series S / X sales to briefly overtake the PS5 in that period. Ryan says there’s no other time during this latest generation of consoles where Xbox sales have materially exceeded the PS5.
The final portion of Ryan’s deposition was focused on the cloud. PlayStation Now, Sony’s previous cloud gaming service, had a subscriber base of 3 million users, Ryan says. He now predicts that cloud gaming won’t be a meaningful thing until at least 2025:
I would say that cloud technology will become a meaningful component of how gamers access games between 2025 and 2035. We’re making significant investments in cloud in anticipation of it becoming a very meaningful way of how gamers access game content.
Economics with a side of quantitative models and washed down with a unicorn
The FTC went on to call Robin Lee, PhD, a professor of economics at Harvard University. He has worked with the FTC many times in the past, appearing as a speaker and panelist to discuss competition and consumer protection. He is very much an expert in the competition field, so Microsoft, naturally, wanted to try and tear his quantitative models apart.
This led to an argument about the Nintendo Switch again because it’s key to how Lee has modeled the market and the FTC’s argument that the PlayStation and Xbox should be defined as a “high performance” console market that’s separate from the Nintendo Switch. I find this whole Switch argument tedious. Of course, PlayStation and Xbox compete with Nintendo Switch, but not in the same way as they compete with each other.
At times, it felt like Lee was interviewing to become a politician with all the evasive answers. Lee wasn’t helpful in explaining how he had defined the console market early on, which you can tell frustrated Microsoft’s lawyer Beth Wilkinson. This led to a tense exchange early on:
Wilkinson: You specifically said Call of Duty is important in competition, right?
Dr. Lee: I believe I used the phrase meaningfully affect demand and competitiveness in the market. I don’t remember the precise language
Wilkinson: Do you remember being deposed a few days ago?
Lee: Yes. I don’t disagree with that characterization, it’s important for competitors
The rest of the exchanges didn’t get much better, and Wilkinson turned to a whiteboard in an attempt to make sense of Lee’s models. It turned into a showdown into his research, with Judge Corley intervening multiple times.
Lee predicted how many PlayStation players would switch to Xbox if Call of Duty was exclusive to Xbox:
On average during Call of Duty titles during generation 8, Xbox share would increase by 8.9 percentage points.
Such a loss would come from PlayStation losing players, as Call of Duty isn’t available on Nintendo Switch. Wilkinson argued that Lee’s model takes the data from older consoles like the PS4 and Xbox One and then applies it to new ones. Wilkinson also pointed out that Lee didn’t have models for share shifting in game subscriptions like Game Pass or cloud gaming services where titles like Call of Duty are taken away fully.
At this point, Wilkinson was mapping out Lee’s models on a whiteboard in the courtroom to show how they had different inputs and data sets to predict the impact of withholding Call of Duty from PlayStation. It was a little difficult to follow by just listening into the audio, but one of Lee’s models predicted that in the console market, there would be a share shift of 8.9 percentage points, based on past sales data of Xbox One and PS4 consoles. Another predicted a share shift of 5.5 percentage points if it’s assumed that 20 percent of Call of Duty players would convert to Xbox if it was taken away.
Wilkinson argued that if Lee is wrong about the 20 percent of players converting to Xbox, then the result changes a lot. If it’s just 15 percent, then “it doesn’t give Xbox a net positive for an incentive or reason” to withhold Call of Duty, argued Wilkinson.
We then moved on to the question of exclusivity. Microsoft has its own models for Activision games and analysis about keeping games exclusive. “Nobody at Microsoft recommended withholding Activision games,” said Microsoft’s lawyer. Lee responded:
“My understanding is that for consoles [Microsoft] recommended not exclusive, but for subscription services they recommended exclusivity.”
Microsoft’s lawyer was quick to point out Lee doesn’t have a model for subscription services, but it’s revealing that Activision games are important for Microsoft’s Xbox Game Pass subscription but not for pure console sales.
After a quick lunch break, Lee returned to be questioned by the FTC’s lawyer, but he also faced a lot of questions from Judge Corley. Lee suggested it’s important to extend his analysis beyond current Activision content and to look at other games the company could produce in the future to analyze the competition effects.
Judge Corley was confused and intervened. It’s fair to say she was skeptical of the analysis around why Lee hadn’t separated out Call of Duty on its own since it’s so key to this hearing:
My economic opinion is that the merged entity is a likely economic incentive to foreclose Call of Duty as well as other activities entitled, and I note that economists think firms tend to act in their economic interest, but there is some uncertainty in the future.
The questions continued back and forth, as Judge Corley wanted to understand why most of the case had been about Call of Duty if Lee was warning of potential harm involving other Activision content. He was referring to the need to have a content library for subscriptions and cloud and whether Microsoft holding the keys would foreclose competition in those emerging markets. Microsoft argues that cloud is just an option and not a market and that subscriptions are also an option.
The FTC moved on to Call of Duty on Xbox and PC, and Judge Corley intervened again and wanted to know why wouldn’t people simply switch to a PC where they could play their games and get more value out of a PC to do productivity work and more:
Judge Corley: The Xbox Series S pricing is closer to the Switch, does it compete with the Switch?
Dr. Lee: There’s the Series X and PS5 and the Series S is still in that market. So if you’re thinking about a price increase on the Series X, the customers who buy the X console, they are more likely to switch to the PlayStation 5 or to a Switch? So this decides the market definition, evaluate a price increase on any of the products in the market.
Lee argued that he models and provides evidence that around 10–15 percent of people who leave an Xbox would to go PlayStation or vice versa and that a “hypothetical monopolist… would find a 5 percent price increase, likely profitable.”
At the end of Lee’s testimony, he was questioned around cloud competition. The FTC says it’s difficult to judge harm in a nascent market like cloud as it’s a market that’s still seeing new competition. “The role that smaller entrants have can be greater than in other mature markets because if they can’t get access to content, then harm from foreclosure could be magnified in the future,” said Lee.
The European Commission managed to secure a remedy from Microsoft to enable a free license to consumers in EU countries that would allow them to stream via “any cloud game streaming services of their choice” all current and future Activision Blizzard PC and console games that they have a license for. Cloud providers will also be offered a free license to stream these games in EU markets. Microsoft has already claimed it will apply this automatic offer globally, but the FTC has largely dismissed Microsoft’s potential cloud agreements.
Image: Nvidia / Microsoft
Nvidia’s testimony zipped by at 240fps
After a grueling back and forth during Lee’s testimony, it was time for something lighter. Nvidia’s Phil Eisler, who leads the GeForce Now team, appeared in a prerecorded deposition video. The FTC had called Nvidia as a witness in a nine-minute video that felt like it went by as quickly as the 240fps that GeForce Now supports.
Microsoft had previously kept its own games off GeForce Now to not compete with xCloud, but the Xbox maker signed an important deal with Nvidia earlier this year to bring its Xbox PC games to GeForce Now.
“We’ve found over time that we get closer and closer to the quality of playing locally,” said Eisler. “Our cloud gaming servers are more powerful than consoles, so we’re able to run higher frame rates and add more visual effects.” Nvidia has upped its frame rates from 30fps all the way up to 240fps, which dramatically reduces latency.
Activision games were available on GeForce Now during its initial beta period before being pulled from the service. “We had a number of those [Activision] games on the service at beta,” says Eisler.
“Did Activision agree to make these games available?” asks the FTC. “We worked with a contact at Blizzard; they were supportive of the games being available during beta.” Call of Duty games were also on GeForce Now during beta and were “one of the more popular games on the service.”
Microsoft’s lawyer took over questioning to ask about the company’s agreement earlier this year for Xbox PC games on its streaming service. In a March 2021 email exchange with Xbox chief Phil Spencer, Xbox Game Studios head Matt Booty recommended that Bethesda’s games also be pulled from Nvidia’s GeForce Now service shortly after Microsoft’s acquisition of Bethesda.
“We have pulled all Xbox Game Studios titles from GeForce Now so as to not compete with xCloud,” said Booty. “I would recommend that in the absence of any other plans that we do the same for Bethesda titles.” Microsoft signed a deal with Nvidia recently to bring its Xbox PC games to GeForce Now and try and appease regulators like the FTC. Nvidia was originally opposed to the deal otherwise.
“The agreement entitles us to the content provided the transaction completes on the Activision side,” said Eisler. “We have already begun working with Microsoft to onboard their first-party titles, so we’re confident that will solve our concerns there.”
Is Call of Duty an essential game?
For the final part of day three, Microsoft called on its own economic expert: Elizabeth Bailey, PhD. Bailey is an expert on antitrust, competition policy, and intellectual property issues.
Bailey started off by claiming that “Call of Duty is not essential, critical, or a must-have” game. “It’s not a unicorn,” said Bailey, directly contradicting what Judge Corley and Lee had said earlier. Bailey then argued that Lee’s markets are “too narrow” and that the merger will actually expand the reach of content — something we’ve heard Microsoft and even the European Commission argue thanks to the cloud deals for Call of Duty.
Microsoft has also argued its Activision deal is about mobile, not console. Xbox mobile revenue is “less than half a percent of [overall] mobile gaming revenue,” said Bailey. “Activision Blizzard is also very small in mobile gaming. So combined, they’ll have 3.8 percent of mobile gaming.”
Bailey has also been given access to key telemetry data from both PlayStation and Xbox for Call of Duty. Microsoft argues that data for market share and usage shouldn’t be limited to just the US and that it should be global. “It reinforces that nexus of competition and competitive decisions are made not global, nor local or limited to the United States,” said Bailey.
Bailey was able to analyze game time to determine if the same games are popular in the US and other parts of the world. “If you look at the most highly played games, that set of games that are most highly played in the US is a very similar set of the most highly played games in other countries around the world,” says Bailey.
Bailey confirmed that Lee had access to the same telemetry data, but the pair have obviously come to different conclusions. It’s worth noting that telemetry data isn’t always conclusive. Microsoft used telemetry data to justify removing the Start button in Windows 8, and look what happened there.
Microsoft wants to paint Call of Duty as not all that important because gamers play plenty of other games. Bailey said there is a “good percentage of gamers” who are playing more than 10 franchises on PlayStation. She has also looked at comparisons between Call of Duty and God of War Ragnarök, games that were bundled with consoles, and argues that how often a game is played on a first day is a proxy for how important the game is.
Judge Corley intervened here, asking whether people had a choice of what game was bundled and whether these bundles varied in different states across the US. Bailey didn’t have an answer to that other than an anecdote about buying a console herself and deciding between bundles. That could be a big hole in the telemetry analysis.
Bailey concluded her initial testimony by arguing that “Call of Duty is an important game, and it’s a popular game, but there’s nothing to suggest it’s… uniquely important.” She’s also looked at the Nintendo Switch being successful without Call of Duty. Switch share has grown 35 percent without Call of Duty, Bailey claims. Bailey’s testimony will resume on day four.
It’s Satya Nadella and Bobby Kotick time
Day four looks to be a big one. We’ll hear more from Bailey, but the day will kick off with Activision CEO Bobby Kotick. Microsoft CEO Satya Nadella will also appear at around 1:30PM PT, and Nvidia’s Jeff Fisher will also appear via a video briefly. Microsoft is also calling Dennis Carlton, PhD, another economics expert, to pick holes in Lee’s report.
The hearing will resume again on Wednesday morning at 8:30AM PT / 11:30AM ET. Judge Corley has a prior midday commitment, so there will be a long lunch break until Nadella appears.
The Verge will be covering day four of the case closely on Wednesday, and you can follow all of our live coverage and daily recaps right here.