Microsoft Activision showdown with FTC: Biggest takeaways

Microsoft and its current main acquisition target, the video game publisher Activision Blizzardended their five days in court in San Francisco as the Federal Trade Commission sought to block the deal from going through, but not without several fascinating facts emerging.

And it’s not just about games. Information about Microsoft’s business ambitions, its acquisition approval process, and its top competitors in cybersecurity has been revealed as part of the hearing, thanks to documents and testimonials from executives. Such big releases don’t happen every day, and in the past several years Microsoft has avoided high-profile experiments that can lead to several high-profile disclosures at once.

The FTC had originally planned to bring its case against the deal before an administrative law judge in August, but then opted to seek a preliminary injunction in federal court as the agency became concerned Microsoft would try to shut down, though some jurisdictions did not. Cancel the order. buying.

In addition to regulators in the United States and the United Kingdom, Sony He also opposes the deal. The PlayStation 5 console competes with the Xbox Series S and X consoles, and the company has said that anti-competitive effects would arise if Microsoft took control of Activision Blizzard.

Here is a summary of the salient facts that have come to light in recent days and that still linger after both sides delivered their closing arguments on Thursday.

• Mobile, mobile, mobile. The drive to expand Microsoft’s mobile gaming business at least in part inspired the acquisition of Activision. “It was very imperative for us if we were going to stay (relevant) and grow important in the market, that we would have to find mobile customers for Xbox,” Phil Spencer, chief gaming officer at Microsoft, said last Friday. Revenue from mobile games is growing faster than revenue from games on PC or consoles, and Microsoft executives have repeatedly said in hearings that the company has made little progress building major mobile gaming content.
• Several previous portable targets. Microsoft considered several other companies before choosing to buy Activision Blizzard, including FarmVille publisher Zynga, Pokemon Go developer Niantic and Japanese digital entertainment mainstay Sega Sammy and Square Enix, according to affidavit and documents released in the case.
• interest in Asia. While the Xbox has a respectable market share in the US, it’s less popular in Japan, where Nintendo and Sony rule. A 2019 Microsoft analysis of a potential Square Enix bid said that “acquiring Square Enix will provide games with market relevance in a region that currently lacks a meaningful Xbox presence, allowing us to reach more gamers in more geographies.”
• valuable incentives. Microsoft executives said Sony paid game developers a fee to discourage them from shipping games like “Ghostwire: Tokyo” and “Deathloop” on Xbox. Microsoft pays its own fees, and Spencer said that buying Activision Blizzard means Microsoft won’t have to spend as much on incentives.
• Several games are under consideration. One of the more dramatic moments in the five days of the hearings was when the FTC’s lead attorney, James Weingarten, sought to get Spencer to make certain commitments on Microsoft’s part. Weingarten asked Spencer to say that he wouldn’t be pulling any future Call of Duty games from PlayStation consoles, a statement that’s in line with what Microsoft has said for months. Weingarten then went a step further, asking Spencer to do the same with all of Activision’s content. Spencer did not immediately agree. Activision Blizzard publishes several other games besides Call of Duty, such as those from the Diablo and Overwatch franchises, but the bulk of the attention has been on Call of Duty. Sony Interactive Entertainment CEO Jim Ryan wasn’t happy with the slate of Microsoft-created Activision Blizzard games that will still be available on PlayStation after the acquisition closes. “Overwatch exists, but Overwatch 2 does not exist, which is the current version of the game,” he said.
• Microsoft’s ambitions are far reaching. The Federal Trade Commission was able to obtain documents that Microsoft CEO Satya Nadella sent to senior executives and board members that outline Microsoft’s financial goals for the current decade. The documents showed Nadella aims for Microsoft to be $500 billion by fiscal 2030, with revenue growth of at least 10% year-on-year. One document stated that Microsoft’s security, compliance, identity, and management businesses could reach $100 billion in revenue by fiscal 2030, while the company wants its Teams communication app to reach 1 billion monthly active users by then.
• Poor access to devices. Spencer said during his testimony that Sony was reluctant to send Microsoft development kits for the PlayStation 5 before its release in 2020, and this prevented Microsoft from optimizing its Minecraft game for Sony’s current console. Spencer said this puts the game at a disadvantage compared to other developers. Sony’s Ryan explained why his company supplies development kits to Microsoft later than it does to other studios. “The commercial risk associated with this knowledge of feature sets leaking into our main competitor is not something we would choose to rely on any contract to enforce,” Ryan said. Players can find an older version of Minecraft on PlayStation 5.
• deal limit. Amy Hood, Microsoft’s chief financial officer, said in written testimony during the hearing that she gives final approval to proposed deals for a certain amount of dollars, but Microsoft’s board of directors must sign off on deals worth more than $500 million. Microsoft had $104 billion in cash and cash equivalents at the end of March, and 2022 revenue exceeded $204 billion.
• negotiation leverage. Microsoft was determined to ensure Activision Blizzard’s Call of Duty games stayed on Xbox for its current generation, which debuts in 2020. Bobby Kotick, Activision Blizzard’s CEO, relayed that if Microsoft refused to offer a more favorable revenue share of 70- 30 the usual. Microsoft CEO Sarah Bond said the games would no longer be available. The FTC attorney coincidentally mentioned that Microsoft agreed to accept 20% instead of the typical 30%.
• Sony’s changing expectations. In early 2022, two days after Microsoft announced its plan to buy Activision Blizzard, Ryan wrote in an email to someone else: Sony group The CEO said he was “quite sure” that Call of Duty would be available on PlayStation hardware for many years. But he seemed to have lost faith in that belief. In a videotaped testimony, Ryan said he had “grave concerns” about whether Call of Duty and other Activision Blizzard games would continue to be available on PlayStation after the deal.
• Kotick controller error. Kotick has been into video games for decades, and was fumbled when he first looked at a Nintendo Switch console and decided it wasn’t going to be a hit. He was more impressed with Nintendo’s previous Wii console. became the key The third best selling game of all time. When an FTC lawyer asked Kotick if Activision Blizzard would produce a Call of Duty game for a future Nintendo console, he said, “We missed the opportunity for the previous generation Switch, so I’d like to think we’d be able to do that, but we’ll have to look.” “.
• Opposition pass game. Kotick explained that while Activision Blizzard experimented with putting games into subscription libraries, he didn’t think it would lead to a “long-term sustainable business”. He said he considered putting games on Game Pass in 2020 during negotiations with Microsoft over Activision Blizzard’s latest licensing agreement, but the company ultimately decided not to move forward with it, he said. He said he could not imagine anyone offering terms of trade that would be so favorable.
• Where’s Amazon? Weingarten noted that while Microsoft has agreed to offer young gamers Call of Duty to cloud gaming like Boosteroid and Ubitus, it hasn’t done the same with Amazon, which offers cloud gaming service Luna. Amazon Among Microsoft’s leading competitors in the field of cloud computing.
• cloud flopping. Microsoft sought to supplement PC and console games with a cloud-based streaming option, which was included with the Game Pass Ultimate service, along with a library of games to download and play for a monthly fee. Microsoft began testing cloud gaming with consumers in 2019. Bond saw gamers primarily use the cloud option not with their phones but with their consoles, while they wait for downloads to finish. At that point, she said, they switch to playing games locally. Tim Stewart, chief financial officer of Microsoft’s Xbox division, said during his testimony that the cloud gaming option is not growing and is not profitable. “The feedback so far is that it’s not good enough — you know, certainly as an alternative to any of the existing platforms,” ​​Nadella said. “But you know, it could get hacked at some point, in something new, but it hasn’t happened yet, either on the economic side or on the content side.”
• Cloud infrastructure scaling. The big-picture memos from Nadella included figures for the size of various businesses across Microsoft, one more important than the other to the company’s investors. Perhaps the number most tracked in Microsoft’s earnings report after revenue and earnings is Azure public cloud growth, because the software maker doesn’t disclose Azure revenue in dollars. One of Nadella’s memos said Microsoft’s “infrastructure” revenue in fiscal year 2022 was $34 billion. The tally was “very close to our estimate,” led by Mark Murdler, Bernstein Research analysts led by Mark Murdler, equivalent to a Buy rating on Microsoft stock.
• Critical security competitors. One document that became publicly available as part of the hearing identified four security companies that Microsoft used to track its sprawling cybersecurity operation. The results contributed to a scorecard for evaluating performance among senior Microsoft executives. The scorecard metrics included the percentage of ‘managed accounts’ with at least one account Octa Detection, “Percentage” of Windows 10/11 MAD (Monthly Active Devices) that have CrowdStrike Components detected, “Percentage of recipients of mail protected by Proofpoint”, and “Percentage of commercial Windows 10/11 MAD containing Symantec Data Loss Prevention (DLP) components are detected. “
• Exclusive exploration. Microsoft has argued that it will keep Call of Duty on PlayStation and make games in the franchise available on multiple cloud streaming services for a decade. “The strategic logic of the acquisition and financial valuation are consistent with making Activision’s games more widely available, not less,” Hood said in written testimony. But on the fifth and final day of hearings, the FTC succeeded in obtaining witnesses to prove that Microsoft was evaluating ways to try to reduce the availability of Activision Blizzard content on the Sony PlayStation. Stewart confirmed that in preparation for the Microsoft board meeting, executives had been examining a scenario of declining Activision Blizzard game sales on PlayStation and ways to make up for the shortfall in sales of more Xbox consoles and Game Pass subscriptions.

Activision Blizzard and Microsoft have agreed to terminate the deal if it is not completed by July 18th. County Judge Jacqueline Scott Corley said Thursday that she’s not sure when a decision on the preliminary injunction will be made. “But I’m obviously conscious,” she said.

He watches: Activision Blizzard CEO Bobby Kotick and Microsoft CEO Satya Nadella to testify today