Microsoft and Activision CEOs battle to keep a giant Xbox deal alive

Day four of FTC v. Microsoft was always going to be a big one. Most of the drama happened outside of court, but both Activision CEO Bobby Kotick and Microsoft CEO Satya Nadella appeared on the witness stand in an attempt to save their $68.7 billion megadeal.

While I expected more of a grilling of both CEOs from the FTC and even Judge Jacqueline Scott Corley, Bobby Kotick delivered some important testimony about Call of Duty on the Switch, and Satya Nadella tried to convince us that in his ideal world where everyone is happy, healthy, and wealthy, he’d love to end console exclusives if it wasn’t for pesky Sony.

It also wouldn’t be a day in this hearing without a Nintendo Switch debate — this time, Microsoft tried to argue it’s how gamers spent their time during the Switch launch that matters. Nvidia also appeared again briefly before Microsoft called Dennis Carlton, PhD, an economics expert who sounds like he’s paid $2,000 an hour to read Verge articles.

Bobby Kotick regrets not bringing Call of Duty to the Switch

Activision CEO Bobby Kotick was first to the stand in the morning, giving us a brief history lesson of how he bought Activision more than 30 years ago when it was insolvent and “lost its way.”

Activision manages to create a new Call of Duty game every year, something that Sony has argued makes it a particularly unique game. EA’s Medal of Honor inspired Call of Duty, admitted Kotick, after “people at Activision were playing it.” As Call of Duty is based on conflicts and war, there’s almost an endless supply of history to create yearly installments. “We had to instill a compensation and reward system to keep people motivated to work on sequels,” says Kotick.

So why isn’t such a huge and valuable game exclusive? “You’d alienate 100 million monthly active players,” says Kotick.

Activision doesn’t need to make Call of Duty exclusive because it leverages its publishing power in other ways. Sarah Bond, head of Xbox creator experience, testified last week that Microsoft was forced to agree to a new revenue sharing deal with Activision to get a version of Call of Duty for the launch of the Xbox Series S / X consoles. Kotick wanted Microsoft to agree to a new revenue share deal; otherwise, Xbox would miss out on an optimized version of Call of Duty. “It was clear that Call of Duty would be on PS5, and that would not have been good if it was not also on Xbox,” said Bond last week.

Activision also picks which platforms Call of Duty should be available on, and sometimes it picks badly. “I made a bad judgment,” says Kotick about not putting Call of Duty on Switch. Activision had put Call of Duty on the Nintendo Wii previously because Kotick thought it was “the most extraordinary video game system ever created,” but he was less impressed with the Switch initially:

How did that work out for Activision? “It’s probably the second most successful video game system of all time,” says Kotick. “So it was a bad decision on my behalf.”

Kotick also discussed Xbox Game Pass and how Activision isn’t currently interested in the service. “I have a general aversion to the idea of multi-game subscription services,” says Kotick, before saying putting games in a subscription service “would degrade the economics.” That sounds a lot like the “value destructive” comment PlayStation chief Jim Ryan claimed was a common opinion held by publishers.

The FTC was quick to push Kotick on multi-game subscriptions, pointing out that Activision is in the business of making games and has an incentive to be everywhere. Kotick argued that Activision hadn’t made a formal decision about not putting its games on subscriptions, and after a tense back-and-forth, he admitted there could be a strategic reason to offer content on game subscriptions “for a small duration of time, but not something sustainable.”

Kotick then had to face questions about the cloud. Activision had games on Nvidia’s GeForce Now cloud gaming service during the beta, but they were removed as the publisher wanted a commercial deal with Nvidia. Kotick met with Nvidia CEO Jensen Huang in 2020 with an internal email showing a list of talking points about Activision wanting to sign a commercial agreement to get Activision games back on GeForce Now.

Kotick says he never used the talking points, but the FTC painted a picture here that Activision would put its games on subscription services and cloud services if the price was right, if it could negotiate favorable commercial terms.

The final part of Kotick’s testimony involved Call of Duty on Switch again. The FTC revealed that Kotick only found out about Microsoft’s plans for a Nintendo Switch version of Call of Duty from news reports and that the agreement Microsoft signed with Nintendo also purports to bring a future Call of Duty game to a future Nintendo console.

But the FTC pointed out that in Kotick’s previous testimony, he says:

Judge Corley intervened. “If the merger doesn’t go through, you said you made a mistake with respect to the Switch, you’re not going to make that mistake again. What would be a reason not to do so?”

The FTC also asked Kotick about the difference between Call of Duty: Modern Warfare II and Call of Duty: Warzone — Warzone obviously has a mobile version. Kotick argues that games like Modern Warfare II will eventually be playable on a phone, but not right now. The FTC then cited a previous statement where Kotick said playing it on a phone would be “like using a refrigerator for a safe.”

The FTC ended its questioning by pointing out how much Bobby Kotick stands to pocket if the Activision Blizzard deal goes ahead. Microsoft agreed to buy Activision at $95 a share, a large premium on its value at the time of the deal announcement. Kotick owns approximately 4.3 million shares in Activision, according to the FTC, which means if the deal closes, Kotick’s stock would be worth around $408 million — a true payday for the CEO of a company that the state of California sued in 2021 alleging that the video game publisher fostered a pervasive culture of harassment going back years.

The Wall Street Journal also released its own report in 2021 accusing Activision Blizzard CEO Bobby Kotick of knowing about cases of harassment of his employees and, in one case, even participating himself by leaving a voicemail threatening to have his former assistant killed. Kotick has denied that there’s a culture of harassment at Activision Blizzard and described the reporting on employee harassment and abuse as “mischaracterizations.” Activision Blizzard struck an $18 million settlement with a US employment watchdog in 2021; multiple executives have since departed the company. Activision has also updated parts of Overwatch and World of Warcraft to remove in-game references to employees accused of harassment or other offensive behavior.

Satya Nadella hates console exclusives but loves the cloud

Microsoft CEO Satya Nadella appeared in the afternoon session, and the FTC was first up to question him. The regulator was quick to submit and show evidence of Xbox Series S / X taking share for three quarters in a row — something Microsoft reported in the fourth quarter of its 2022 financial results. It was probably related to Jim Ryan’s testimony over Sony’s shipping constraints that allowed the Xbox Series S / X sales to briefly overtake the PS5 in 2021.

The FTC was keen to hone in on Microsoft’s internal targets for gaming, including Nadella’s own self-assessment from August 2022 that includes performance metrics for top Microsoft leaders. The FTC pointed out that Microsoft exceeded its own metrics for the gaming business, but Nadella argued the company had set those targets low.

Nadella is very bullish on Microsoft’s cloud ambitions and growth, and it’s clear that also applies to gaming. The FTC read a document from Microsoft saying it “continues to lead in the fast growing gaming cloud gaming market” and an internal email where Nadella discusses a Meta event where Microsoft was part of the launch of a new VR headset. Microsoft promised to bring Teams and other software to Meta’s device in October 2022, and Nadella says he wants to chase more cloud opportunities like Meta:

The FTC questioned Nadella on cloud gaming and how it can be used on a TV. Nadella argued that’s just one case:

Nadella admits it’s “possible” for cloud gaming to become a breakthrough market but that it’s not something that has happened yet. He even claimed that streaming is a “minor” part of his definition of cloud, which also includes Xbox Live:

Microsoft’s lawyers then took the opportunity to question Nadella after fairly lightweight questions from the FTC. The topic of Xbox exclusives is up first, and Nadella pulled no punches by going after Sony straight away:

Exclusives have driven console adoption for decades now and are set to sway a future battle for subscriptions and cloud gaming. Would Microsoft really give up exclusives in an ideal world? Would Halo actually launch on PlayStation? I think we all know the answers to those questions.

Speaking of exclusives, Nadella committed to keeping Call of Duty on PlayStation and not making it the Xbox exclusive that Sony and the FTC allege Microsoft will do. Xbox chief Phil Spencer has already committed under oath to keep Call of Duty on PlayStation, but Microsoft’s lawyers took another opportunity to point this out:

How gamers spend their time matters

Elizabeth Bailey’s, PhD, testimony also continued during day four, and it was time to talk about the Nintendo Switch again. This time Microsoft decided to argue it’s about where gamers spend their time and how that affects competition for Xbox. Bailey said she had analyzed data from the 10-week Switch launch period and found a decline in the number of gamers on Xbox and PlayStation consoles and game time hours.

The FTC and Microsoft argue about the Switch every day because the FTC doesn’t want to count the Switch as a competitor to Xbox, but Microsoft argues it is. Bailey’s analysis shows that the Switch has impacted gamer attention and where they spend their hours.

If the Switch is included in the global console market, Bailey says “no matter which metric we use, Xbox is the third place” and has been for the last five years. Bailey also argues that PCs also compete with the Xbox because gamers both largely play the same top 15 games across them. “Many gamers multi-own; they already have a PC. It’s a large percentage,” says Bailey. The FTC poked holes in Bailey’s opinions before we moved on to Nvidia.

$2,000 an hour to read Verge articles

Dennis Carlton, PhD, was the last witness of the day, and I think it’s fair to say this wasn’t a case of saving the best until last. Carlton has contested the FTC’s claims about competition and Microsoft’s proposed Activision Blizzard acquisition, so the FTC was immediately on the attack — or, as one Twitter commentator opined: “that guy got grilled harder than the 4th of July.”

The FTC immediately revealed that Carlton is getting paid $2,000 an hour by Microsoft and that there are five federal cases where his testimony as an expert witness has been excluded. We’ve seen a similar line of questioning against expert witnesses in the Epic v. Apple trial, but the FTC was particularly relentless here and prodded at his claims that Sony is more motivated by blocking the merger than actually getting a good deal for Call of Duty.

There was a clear frustration at times from Judge Corley at some of the questioning and answers, with plenty of tense exchanges when suddenly a Verge article appeared in court! The FTC wants to know why Carlton is citing a Verge article about Microsoft’s deal with Nvidia for cloud gaming instead of the terms of the deal. I’d like to think it was because the author deserves to be paid $2,000 an hour to listen to Nintendo Switch debates for five days, but alas, it wasn’t:

Microsoft then had some brief questions for Carlton before the day drew to a close.

The end is near

It’s the final and fifth day of FTC v. Microsoft, which means this hearing is nearly over. Today, we’ll hear from Xbox CFO Tim Stuart and Steve Singer, SVP of developer relations at Nintendo (by video deposition). Microsoft has also submitted CFO Amy Hood’s written declaration, so we’ll only hear a brief cross-examination today.

Day five kicks off Thursday morning at 8:30AM PT / 11:30AM ET. Judge Corley says the plan is to finish evidence by midday and closing arguments at 2:30PM PT / 5:30PM ET.