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Whether the Federal Trade Commission wins its antitrust case or not, its attempt to stop Microsoft’s $68.7 billion acquisition of Activision Blizzard has revealed a trove of new data for everyone.
The FTC has argued in a federal court that the merger would harm competition in the game industry and be bad for consumers, as Microsoft could pull Activision Blizzard’s games like Call of Duty away from the Sony PlayStation, despite Microsoft’s stated intention of not doing so for at least 10 years.
In this case, the FTC might not have had an obvious winning hand, as the industry has an odd situation. Microsoft has the highest value ($104 billion in cash alone, versus $13.4 billion for Sony) at $2.49 trillion as a company compared to $115 billion for Sony, and yet it is in third place behind Sony and Nintendo.
Hence, there’s some significance to Microsoft’s Xbox first-party head, Matt Booty, sending an ill-advised email in 2019 saying Microsoft “has the ability to spend Sony out of business.” That was long before the deal was announced 17 months ago, but it could be used as a sign of intent. Microsoft said it never pursued this strategy.
While competing fiercely is fine, using monopoly power to drive a rival out of business so you can raise prices later is a no-no. Arguing the opposite was true, Xbox chief Phil Spencer said Xbox in third place was “not a robust business.”
This case has always revolved around the issue of credibility. Will Microsoft play nice or use its market power to undermine its rivals, such as taking Call of Duty and other titles from rival platforms? The FTC has gone fishing through emails to discover whether Microsoft’s intent is different from what it says. Put that against the backdrop of a judge who seems to know little about games and the inability of companies from protecting their secrets in a government proceeding. We might get other legal proceedings that will put the date for closing the deal — July 18 — in jeopardy. It’s popcorn time.
I’ve been away on vacation during much of the hearings, so I’ve had a chance to be a spectator on this one. But it was interesting to see the secrets that spilled out in the public hearings, similar to how secrets of the mobile gaming business were revealed in the Epic Games vs. Apple antitrust trial.
I’ve looked at the stories coming from the Verge, Axios, IGN, Kotaku, Bloomberg, the New York Times and more to find the nuggets of insider information that escaped from the all-too-secretive platform companies.
Satya Nadella, CEO of Microsoft, uttered an alternative viewpoint that defied much of the strategy behind the entire history of console gaming when he said in his testimony, “If it was up to me, I would love to get rid of the entire exclusives on consoles. I have no love for that world.”
And Microsoft offered a contract to Sony to keep Call of Duty on the PlayStation for a long time — a deal that Sony’s Jim Ryan turned down while Nintendo took it. Ryan testified on video, “I believe they’re going to use Call of Duty somehow to damage us.” Ryan is right to be concerned, as Call of Duty has sold more than 425 million units to date and generated more than $30 billion in revenue.
And in a case of what you do is different from what you say, the FTC argued that Microsoft bought ZeniMax Media and its Bethesda Game Studios for $7.5 billion in 2020 when it saw that Sony would pay to make Starfield exclusive to the PlayStation. Now it’s an exclusive on the Xbox and PC. Hurting the FTC’s case a bit, Sony’s Ryan acknowledged that Starfield being exclusive to Microsoft wasn’t anti-competitive.
“I don’t like it, but I have fundamentally no quarrel with it,” Ryan said about that. “I don’t like it, but I don’t view it as anti-competitive.”
The judge, Jaqueline Scott Corley, reminded us of antitrust law when she said that it’s not the harm to Sony that matters, but the harm to consumers. The FTC tried to argue that taking Call of Duty away from Sony would hurt Sony’s consumers, even though those consumers could still buy it on Xbox or the PC for the same price, assuming they have the right hardware. It could also harm consumers by reducing Sony’s own investments in gaming by financially wounding it.
Bobby Kotick, CEO of Activision Blizzard, testified that doing so would cause brand damage by outraging 100 million PlayStation gamers and so it wouldn’t remove Call of Duty from PlayStation.
It was enlightening to see Microsoft’s interest in Activision Blizzard may have been motivated in a bigger way by its interest in Activision Blizzard’s mobile game division, King. And before it made the Activision Blizzard bid, it tried to get mobile game publisher Zynga but that company was snapped up by Take-Two Interactive for $12.7 billion.
Sony’s Ryan, meanwhile, expressed regret that he didn’t get Roblox on PlayStation out of concern that children on that platform could be exploited. Now, after some review, he said the company is engaging with Roblox to get it on the platform.
The Verge spotted that some of Sony’s documents were poorly redacted. While looking at the lines that were crossed out with black pens, they could see that The Last of Us Part 2 cost the company $220 million to make, with 200 people working on it, while Horizon Forbidden West cost $212 million to make, with 300 working on it for over five years. Both games made considerably more money.
Sadly, we didn’t get the marketing budgets, which were substantial. We do know Horizon: Forbidden West has sold about 8.4 million copies, and The Last of Us Part 2 has sold over 10 million. If you figure usual prices for gross revenues, that puts Horizon at $528 million and The Last of Us Part 2 at $600 million at least. That certainly gives them the money to reinvest in the future of those franchises. In this case, Sony kept them exclusive and didn’t have to pay royalties to platform owners.
In the unSharpied documents, Sony also revealed that a million Call of Duty players spent 100% of their time playing Call of Duty in 2021. It also said that Call of Duty generated $800 million for PlayStation in 2021 alone in the U.S. and perhaps $1.5 billion globally. It also looks like Sony’s exclusive marketing deal with Activision for Call Call of Duty will expire in late 2023. Sony went on to say half of PS5 owners also have a Nintendo Switch.
Microsoft also failed to redact some of its acquisition targets. Those were later marked up, but not before Axios noted that the list included Thunderful, Supergiant Games, Niantic, Playrix, Zynga, Bungie, Square Enix, Warner Bros., Sega, IO Interactive and Scopely. Bloomberg reported in 2020 that Microsoft was considering acquiring Japanese studios. At the time, Spencer denied that, saying to GameSpot the report was inaccurate.
Within days of the GameSpot interview, Spencer sent an email to Nadella saying, “We believe that Sega has built a well-balanced portfolio of games across segments with global geographic appeal, and will help us accelerate Xbox Game Pass both on and off-console.” Bungie also looked bad for disputing a GamesBeat report saying Microsoft was talking to it about an acquisition, only for documents to emerge saying this was a possibility after all. Sony eventually bought Bungie.
Kotick admitted making a mistake in not putting Call of Duty on the Nintendo Switch, which has had stellar sales. But he defended not putting Call of Duty into a subscription service like Xbox Game Pass, which would “degrade the economics.” He said he found out about Microsoft’s plans to put Call of Duty on the Switch or a new Nintendo console via news reports.
Kotick might not feel too bad if the deal is nixed, as the breakup fee on the deal is $3 billion if Microsoft doesn’t close the deal by July 18.
Did the FTC prove its case? I can’t say just yet. Microsoft makes a decent point in saying all the regulators of the world except the U.S. and the United Kingdom have approved the deal.
But I hope to have more reasons to binge on popcorn.
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