Microsoft CEO Satya Nadella arrived at the U.S. District Court for the Northern District of California in San Francisco on June 28, 2023, as the court case between Microsoft and video game publisher Activision Blizzard came to an end. While the Federal Trade Commission sought to stop the deal from closing, the trial revealed several interesting facts about Microsoft’s business ambitions, acquisition process, and cybersecurity rivals. This high-profile trial has shed light on information that is not typically disclosed by Microsoft.
The trial, which took place over five days, was originally scheduled to be heard by an administrative law judge in August. However, the FTC decided to seek a preliminary injunction in federal court out of concern that Microsoft would close the deal before receiving clearance from all necessary jurisdictions. Along with regulators in the U.S. and the United Kingdom, Sony, a major competitor to Microsoft in the gaming industry, also opposes the merger.
Here are some notable facts that emerged during the trial and continue to generate interest:
1. Mobile expansion: Microsoft’s acquisition of Activision Blizzard was partly driven by its desire to expand its gaming business into the mobile market. Revenue from mobile gaming is growing faster than revenue from PC or console gaming, and Microsoft executives acknowledged that the company has made limited progress in this area.
2. Consideration of other targets: Before deciding on Activision Blizzard, Microsoft had considered other companies, such as Zynga, Niantic, Sega Sammy, and Square Enix, as potential acquisition targets.
3. Focus on Asia: While Xbox consoles have a solid market share in the U.S., they face strong competition from Nintendo and Sony in Japan. Microsoft saw the acquisition of Square Enix as a way to gain market relevance in this region.
4. Competitive tactics: Microsoft executives revealed that Sony had paid game developers fees to discourage them from releasing games on Xbox consoles. Microsoft also pays fees, and acquiring Activision Blizzard would allow the company to reduce its spending on such incentives.
5. Commitment to game availability: During the trial, the FTC’s lawyer pushed Microsoft’s CEO of gaming, Phil Spencer, to commit to keeping Activision Blizzard games available on PlayStation consoles. While Spencer agreed not to pull Call of Duty games from PlayStation, he did not immediately agree to do the same for all Activision content.
6. Microsoft’s financial goals: Documents from Microsoft CEO Satya Nadella revealed the company’s ambitious financial goals for the current decade. Microsoft aims to generate $500 billion in revenue by the 2030 fiscal year, with significant growth expected in its Security, Compliance, Identity and Management business, as well as its Teams communication app.
7. Hardware access challenges: Spencer testified that Sony was reluctant to provide Microsoft with PlayStation 5 development kits before the console’s release, which hindered the optimization of Microsoft’s Minecraft game for Sony’s platform.
8. Deal approval process: Microsoft’s finance chief, Amy Hood, explained that she provides final approval for proposed deals below a certain dollar amount, while deals valued above $500 million require board approval. Microsoft had significant cash reserves and high revenue in 2022.
9. Negotiating leverage: Microsoft was determined to ensure that Call of Duty games remained available on Xbox consoles. Activision Blizzard’s CEO, Bobby Kotick, indicated that if Microsoft didn’t offer a more favorable revenue share, the games would not continue to be available.
10. Sony’s changing expectations: Sony’s CEO, Jim Ryan, initially believed that Call of Duty would continue to be available on PlayStation consoles after Microsoft’s acquisition of Activision Blizzard. However, he later expressed concerns about the availability of Call of Duty and other games on PlayStation.
11. Kotick’s console misjudgment: Kotick underestimated the success of the Nintendo Switch console, mistakenly believing it would not be a hit. This misjudgment affected Activision Blizzard’s decisions regarding developing games for Nintendo consoles.
12. Game Pass opposition: Kotick expressed skepticism about the long-term viability of subscription game libraries, such as Game Pass. He considered including games in Game Pass during negotiations with Microsoft but ultimately decided against it.
13. Amazon’s absence: The FTC highlighted Microsoft’s decision to provide Call of Duty to small cloud gaming players but not to Amazon’s Luna cloud gaming service. Amazon is a significant competitor to Microsoft in the cloud computing business.
14. Cloud gaming challenges: Microsoft introduced cloud gaming as an option to supplement PC and console gaming. However, it faced challenges in optimizing the gaming experience and gaining widespread adoption.
This trial has provided valuable insights into Microsoft’s gaming business and its strategic decisions. The disclosed facts shed light on the company’s ambitions, competition, and plans for future growth.
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