Microsoft opened the FTC hearing with a Sony bombshell

The first day of the FTC v. Microsoft hearing kicked off exactly as I expected: Microsoft against Sony. We hadn’t even hit the hour mark before Microsoft’s lawyer Beth Wilkinson dropped a bombshell email from Sony’s PlayStation chief Jim Ryan during her opening statement. The exchange between Ryan and Chris Deering, former CEO of Sony Computer Entertainment, revealed that Sony’s PlayStation chief didn’t really think Call of Duty would go exclusive to Xbox and that PlayStation would be fine.

“It is not an exclusivity play at all,” said Ryan. “They’re thinking bigger than that and they have the cash to make moves like this.” Ryan wasn’t concerned about Call of Duty exclusivity because he had spoken to Activision CEO Bobby Kotick, Xbox chief Phil Spencer, and even had reassurances from Microsoft CEO Satya Nadella.

Sony was also just about to announce its plan to acquire Bungie, just days after Ryan’s email exchange. “We have some good stuff cooking,” said Ryan, referring to Bungie. “I’m not complacent, and I’d rather this hadn’t happened, but we’ll be OK, we’ll be more than OK.”

The email exchange set the tone for the day, with Microsoft claiming “Sony has known all along we’ll stand by our promise” and that the PlayStation maker was lobbying against the deal to “protect its dominant position in the market.”

The FTC also had the chance to outline its own opposition to Microsoft’s proposed Activision Blizzard acquisition. The FTC is concerned about Microsoft making Activision games, including Call of Duty, exclusive to Xbox in the future.

The FTC’s lawyer, James Weingarten, explained how important Activision games were to the industry and that the evidence the FTC will put forward over the next few days is “but a fraction” of the total that can raise anti-competitive concerns. The FTC is also concerned about the impact to cloud gaming, and Weingarten revealed the regulator will call on two Nvidia executives to testify about how the company has overcome technical limitations and latency for cloud gaming.

The FTC quickly moved on and called Matt Booty, head of Xbox Game Studios, to the stand. Microsoft and the FTC have been sparring over whether the Nintendo Switch should be considered part of the console market and a true rival to the Xbox or whether the market is just “high-performance” consoles like the PS5 and Xbox Series X. The FTC took the opportunity to question Booty about exactly how Call of Duty would run on the Switch, something Microsoft has promised to do as part of a 10-year deal with Nintendo.

Booty explained Microsoft “would have to adjust graphics and assets to run on Nintendo platforms,” a change that the FTC argues would mean it’s essentially a separate game and dissimilar to the Xbox and PlayStation console versions. The difference matters here because, without Nintendo in the mix, Xbox has nearly half of the US console market share, with PlayStation making up the other half. Otherwise, Microsoft protests it’s in third place.

The FTC was also quick to show how Microsoft used to block its first-party games from rival cloud streaming services, a strategy described by Booty as creating “a moat that nobody else can attack.” In a 2019 email from Booty, his frustrations over Nvidia putting Xbox PC games on its GeForce Now streaming service without Microsoft’s permission boiled over. “We are not putting our first-party IP on competing streaming or subscription services. No effing way,” said Booty. (It’s plausible he wrote something stronger than “effing,” but that’s how it was read in court.)

In a March 2021 email exchange with Xbox chief Phil Spencer, 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.

Booty told the court that his perspective had changed since 2019. “I think since then, we’ve seen that while content is absolutely important to our strategy, it really isn’t a durable advantage that others can enter a field and build a content library relatively quickly,” said Booty.

Pete Hines, Bethesda’s head of global publishing, appeared on the stand next to face the FTC’s questions around Xbox exclusives. A core part of the regulator’s argument is that Microsoft previously acquired Bethesda, and that led to games being locked to Xbox, so Microsoft could repeat this behavior with Activision Blizzard.

Hines was questioned about his apology, in an interview with GameSpot in 2021, to Bethesda fans that won’t get to play Starfield on their PS5. “It bothered me that they were upset,” said Hines. “I don’t like it when our players are upset over something we do.”

The FTC is arguing that game exclusivity is an anti-competitive move and wants to convince Judge Jacqueline Scott Corley that Microsoft will treat Activision like Bethesda instead of how it handled maintaining Minecraft as a cross-platform title with its Mojang acquisition. But Microsoft’s lawyers questioned Hines to get a different perspective. Hines said Starfield wouldn’t be coming out on September 6th if it was also a PlayStation game. “We would not be putting this game out in nine weeks if we were supporting an entire additional platform, in my opinion,” said Hines.

Hines also revealed that Bethesda’s upcoming Indiana Jones game will be exclusive to Xbox and PC. It was originally under contract with Disney for multiple consoles, but the FTC pointed out that the deal was amended after Microsoft’s Bethesda acquisition to be just for Xbox consoles. Hines argued it was “about reducing risk and trying to get to a degree of certainty.” Microsoft also made Starfield and Redfall from Bethesda exclusive after its acquisition.

I’m fairly sure Microsoft would love it if Sarah Bond, head of Xbox creator experience, was just allowed to talk to Judge Corley nonstop for the full five days of this hearing. Bond seemed as calm and collected as a 007 agent during heated exchanges. She even shared some laughter and jokes with Judge Corley after explaining that the Diablo franchise “is built on this idea that you battle an unstoppable evil, which is the devil effectively.”

Even 76-year-old dads like battling unstoppable evils, apparently. “It’s literally my father’s favorite game,” said Bond. “So it’s aimed at a certain audience, shall we say,” remarked Judge Corley, to which Bond replied with, “Yes, including my 76-year-old father.”

Bond spent a lot of her time on the stand explaining things to Judge Corley in a careful and less corporate manner, including license agreements for Xbox Game Pass, cloud gaming, and how Microsoft’s subscriptions can generate interest in Xbox players buying game genres they’ve never played before. At one point, she even described Call of Duty as “a game about being a savior in a war scenario,” which is an interesting way to describe all the war crimes you commit as a “savior.”

Where Bond’s testimony really got interesting was the nitty-gritty details of revenue deals and Call of Duty in particular. Bond revealed how 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. Activision Bobby Kotick wanted Microsoft to agree to a new revenue share deal before work began on an optimized version of Call of Duty for Xbox Series S / X. “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, referring to Microsoft not getting an optimized Xbox version at the same time as the PS5 version launched.

While it’s not clear what exact revenue deal Microsoft eventually agreed to, the FTC’s lawyer accidentally mentioned an 80 / 20 split that was supposed to be confidential. Microsoft has agreed, at times, to lower revenue splits than its typical 70 / 30 percent split for Xbox games “where we believe it was critical to get that content,” according to Bond’s previous testimony.

Bond also discussed Xbox Cloud Gaming, claiming to Judge Corley that it’s just a feature right now and not a separate market. “It’s a feature and delivery mechanism; most of our usage is on console,” said Bond. The FTC isn’t buying that argument and questioned Bond closely about Microsoft’s cloud ambitions.

Microsoft was working on a separate version of Xbox Cloud Gaming (xCloud) that wouldn’t have been tied to its premium Xbox Game Pass Ultimate subscription, the FTC revealed. Microsoft had been working on a “dedicated xCloud SKU” last year, and Bond said “Xbox would very much like to do it” in previous testimony to the FTC in September 2022. But now it’s just a feature, so why the sudden change of heart?

“We’ve continued to get more data about the success and the popularity of xCloud. We’ve gotten more clear on the costs related to it, and we have signed partnerships with others who provide those services,” says Bond.

We also got a surprise admission from Bond around Microsoft’s costs to run xCloud. “We get revenue from it, but when we look at all the numbers, the revenue we get per minute, per hour from that is lower than the cost we get per minute, per hour of that,” said Bond. Essentially, Microsoft isn’t making money out of xCloud yet because it’s costly to put modified Xbox hardware in data centers and run it as a feature that’s mostly used by Xbox players to try games before they download them.

These exchanges are a key argument in the FTC’s case, as Microsoft keeps arguing Xbox Cloud Gaming (xCloud) is simply a feature and not a dedicated market. The FTC argues Microsoft has bigger plans and that its agreements with cloud gaming rivals limit them to using Windows on the server side to stream games. That was highlighted in a particularly amusing back-and-forth:

FTC: “You need a Windows license to stream PC games, correct?”

Bond: “No, you do not. You can stream PC games without a Windows license.”

FTC: “This agreement involves a license for Windows, correct?”

Bond: “That is my understanding.”

The underlying point here is that Microsoft clearly has ambitions that go far beyond Xbox Cloud Gaming being a feature. Microsoft had been working on a dedicated Xbox streaming device in 2021 before confirming it was making changes to the device in May 2022. Project Keystone, as Microsoft referred to it internally, was then spotted on Xbox chief Phil Spencer’s shelf in October. Spencer told The Verge in November that the dedicated Xbox streaming console was pushed back because of its price.

Day two of the FTC v. Microsoft hearing starts at 8:30AM PT / 11:30AM ET today. We’ll get to hear from Xbox chief Phil Spencer and from PlayStation chief Jim Ryan via a prerecorded video deposition. Dov Zimring, former Stadia product lead, will also appear, as well as Jamie Lawver, a senior finance director at Microsoft.

Judging by the exhibit list that both the FTC and Microsoft have submitted, it looks like Phil Spencer is going to have a busy day with the potential for us to hear more about Microsoft’s xCloud strategy emails, how the company’s Activision Blizzard deal came to be, and some details around PlayStation publishing agreements. I’d expect, given the fact both Xbox and PlayStation chiefs are appearing, that it’s going to be yet another day of Microsoft vs. Sony.

The Verge will be covering day two of the case closely, and you can follow all of our live coverage and daily recaps right here.