Xbox CEO Says Microsoft Discussed Keeping Activision Games Off PlayStation

Microsoft Gaming CEO Phil Spencer took the stand Friday in U.S. District Court for Northern California on the second day of the evidentiary hearing on the FTC’s motion for a preliminary injunction to block Microsoft’s Activision buy (see 2306220070). Under direct examination from FTC lead attorney James Weingarten, Spencer testified he views Sony PlayStation as hostile to Xbox’s survival, and acknowledged participating in internal Microsoft discussions about withholding Activision content from PlayStation if the deal goes through, though he said he couldn’t recall specific conversations.

Weingarten argued in opening statements Thursday it’s inevitable that new Activision owner Microsoft would have the ability to “foreclose” the availability of the signature Call of Duty franchise from PlayStation. Microsoft also would be able, through myriad “partial foreclosure” strategies, to punish PlayStation, possibly by releasing degraded versions of Call of Duty on the rival platform, said Weingarten.

PlayStation “is the market leader with considerable capability,” said Spencer when Weingarten asked if he views Sony as an aggressive competitor. “Every time we ship a game on PlayStation,” he said, Sony uses the revenue it gains from that title “to do things to try to reduce Xbox’s survival in the market,” he said. Making Microsoft first-party content available on the PlayStation enables Sony “to use the revenue they make off of our products to sign third-party exclusive deals to block games from our platform,” he said. “They have the opportunity to use the revenue from the games that we ship on their platform to block Xbox’s survival.” A Microsoft attorney on Thursday called Sony the "complainer in chief" in Microsoft's bid to close the Activision transaction.

Spencer is familiar with the term “console wars,” he said. But he equates the term less about company-to-company market share battles, more with the smack talk that fans of the rival console platforms engage in with one another, akin to what sports fans do when they trade insults with fans of other teams, he said.

Spencer hesitated to answer when asked if he thinks Xbox lost the console wars to first-place PlayStation and second-place Nintendo. “As the console wars is a social construct, with the community, I would never want to count our community out,” he said. “If you look at our market share in the console space over the last 20-plus years, we’ve remained in third place for quite a while.”

In the “overall” Xbox competitive landscape, “there were a number of third-party games that the competition was paying” developers to exclude releasing on Xbox, said Spencer, referring to Sony. One of those games, Final Fantasy 16, a Square Enix title, launched last week, but it's “not coming to Xbox,” he said. “Knowing that we have a competitor who is actively signing third-party games to skip our platform, it became more important for us, for our customers, and for continued sales of our console, that we’re able to secure third-party games under our platform, inclusive of Call of Duty,” he said.

That was one of the rationales for Microsoft’s nearly $70 billion offer to buy Activision, said Spencer. Microsoft also “needed to do a lot of work with a lot of partners, given the competitive situation we had against the market leader,” he said.

With Activision under Microsoft’s ownership, Microsoft no longer would need to pay “for exclusivity on our own platform,” said Spencer. “With a competitor who’s paying third parties to skip our platform, we felt it was necessary for us to secure ownership of more content,” he said. “We can’t be in a position as a third-place console where we fall further behind on our content ownership, so we’ve had to secure content in order to remain viable,” he said. Microsoft gets to be the decisionmaker in determining which game titles go to which platforms, and that’s “one of the benefits” of content ownership, he said.

Content exclusivity for Xbox has been a “topic” for discussion in the two decades Spencer has been with Xbox, he said. The discussions have been “a little more complete” than just not shipping for PlayStation, he said.

Weingarten tried to pin Spencer down for specifics about Microsoft’s internal discussions of the economic costs and benefits of skipping first-party Microsoft titles for PlayStation. “When we’re thinking about where a title is, we’re thinking about the overall financial impact of us shipping a title, inclusive or exclusive of certain platforms,” he said.

Microsoft routinely has “overall discussions about the financial impacts of a piece of content, inclusive of what platforms it ships on,” said Spencer. He said he couldn’t recall specific conversations within the company about keeping content away from PlayStation. Spencer did acknowledge he has repeatedly told Microsoft colleagues he didn’t see the point of putting individual games on competitive platforms. He said he couldn’t recall a specific conversation about keeping Activision titles away from PlayStation if the deal goes through but acknowledged “it would seem like a normal conversation for us to have.”