The FTC Trial Unmasks Xbox’s Ambitions

In November 2020, just a few days after the GameSpot interview, Microsoft showed its willingness to pursue Japanese companies, and Sega, in particular. Spencer emailed executives in November 2020, including Microsoft CEO Satya Nadella, “We believe that Sega has built a well-balanced portfolio of games across segments with global geographic appeal, and will help us accelerate Xbox Game Pass both on and off-console.”

While you could argue that on a technicality, Spencer saying he hadn’t reached out to Japanese studios yet was true, since he started running the Sega request up the food chain a few days later, these internal documents prove that the Bloomberg report from 2020 was indeed accurate.

I’m reminded of instances like Bungie vehemently denying reporting that Microsoft wanted to acquire it, only for it to come out in documents that this was true, and while not a one-to-one comparison, the Bobby Kotick interview with Variety in May, where he said the company never had any systemic issue with harassment and that these were “mischaracterizations reported in the media.” He blamed the issues instead on employees’ union efforts. I’ve reported these systemic issues, and then saw Blizzard dodge reporters’ follow-ups asking about Kotick’s comments.

These are instances of denial and accusing well-sourced journalists of inaccuracies. Why does this happen? Within the games industry, large companies and executives have managed to make all sorts of claims to journalists, and without a robust gaming press, it’s tough to hold these entities accountable to their past words. There are few games journalists who get to interview Kotick or Spencer each year, and even fewer who stay in the industry and keep watch.

Putting on a Brave Face

The trial also peeks behind the veil of marketing and PR that companies like Xbox utilize to drum up anticipation for products they’re unsure of.

In 2019, I walked the showfloor of the last physical E3. The game conference had been snubbed by Sony that year, but Xbox was front and center, showing off its upcoming console, and its cloud gaming service Project xCloud on a sleek black stage backlit in green.

A few months later, xCloud vice president Kareem Choudhry told me over a 45 minute video interview for CNN, “We often have conversations about, I’ll say, the 16-year-old in Mumbai, who had heard of Halo, but probably doesn’t have the ability to play it today. That’s where we think streaming presents a real opportunity.”

Choudhry’s confident and highly optimistic remarks hid Microsoft’s greater cloud gaming insecurities and the reality of who would even want to use Project xCloud. Spencer’s internal 2019 email, uploaded to the public on Monday, is more forthcoming. He wrote that in the future, mobile gamers would likely want more casual titles on cloud gaming, something like Minecraft and Roblox, and not Halo.

The first adopters of Project xCloud are likely to be hardcore Halo players, Spencer hypothesized, and if they didn’t care, then it was unlikely anyone else would. “If we can get them to love it they will evangelize,” he wrote, comparing the service to Fortnite.

“If I ask mobile gamers what they want, they won’t tell me that it’s to play Halo on their phone with a Bluetooth connection to an Xbox controller. That’s probably as far from what they want to do on their phone as anything,” Spencer wrote. He noted that Halo didn’t even have the right business model to appeal to these mobile gamers; they want free-to-play games.

Last October, Xbox willingly called cloud gaming an “immature” and “nascent technology” when the United Kingdom raised concerns over how owning Activision Blizzard could give Xbox an unfair market advantage against competitors like Sony and Nvidia. The U.K. regulator didn’t buy this argument and still blocked the deal, citing Microsoft’s massive market share in cloud computing through its service Azure.

“We are exactly like Polaroid,” Spencer wrote in the email, comparing Xbox to film photography, saying that both are struggling to grow in market size. He and Xbox cloud gaming executive Catherine Gluckstein spoke frankly about their cloud gaming service’s shortcomings. He likened mobile gaming to digital photography in how he saw both markets growing at a rapid rate.

“Our solution here is not customer-led, really. It’s led by what we have and a hope. I don’t like this but I’m not smart enough to come up with anything else,” Spencer wrote. Spencer highlighted how Xbox’s core business is opposite of what gamers actually want and the big problems that the company faces as a result.

Spencer outlined how he saw the industry: Gamers are growing on mobile, but they’re playing Chinese games, free-to-play titles and more casual games — all areas where Xbox doesn’t have much to offer. Xbox’s core is Halo, but that core isn’t growing.

What can Xbox do next? Spencer brainstormed out loud a few options, including buying Warner Brothers or acquiring South Korean video game publisher Nexon. Gluckstein, the cloud gaming executive, agreed that they wanted to avoid building a “gold toilet,” in other words, something fancy but essentially useless. Both executives expressed worries that xCloud could be like that symbol of excess.

The Console Wars are Waged in Secret

The other part of Xbox’s narrative that has changed depending on whether it’s talking to regulators in court or to journalists is how it’s doing in the so-called console wars, whose importance to Xbox clearly differs depending on the audience. In 2020, Xbox told me that the strategy was to reach gamers where they are, whether that’s on the subscription service Game Pass or on Windows PCs. But in internal documents and testimony, Xbox admitted that it would have liked to sell games exclusively on Xbox consoles… it started to bundle these titles on Windows to grow revenue, according to Spencer. “That’s not something Sony does,” he said in court.

In a panel with reporters earlier this month, Spencer echoed this, saying of Xbox’s strategy, “We’re going to focus on allowing player choice, but we know that console is kind of the core to how people think.”

Xbox is trying to play all sides here and is changing up its tune depending on who’s asking. The FTC trial has given us a unique look at what’s truly going on though: according to the internal documents, Microsoft executives saw their growth was slowing down and sought to build out a compelling way to reach mobile gamers using cloud gaming. When the U.K. antitrust regulator cited cloud gaming as a reason to block the deal, Microsoft revealed major shortcomings to the technology — issues that Spencer and Gluckstein had discussed in internal emails in 2019. The company hoped outwardly that casual mobile gamers would pick up Project xCloud, but internally, it feared that only hardcore gamers would give the cloud a try, and even they might not care. And even though Microsoft lags behind its console competitors, it’s fully intent on spending its way to the top, similar to what it tried with Mixer and its $10 million contracts to lure Twitch streamers.

The case continues this week through Thursday, with the judge set to make a decision in the next two weeks. The Microsoft Activision deal has a July 18 deadline. If the deal falls through, Microsoft may renegotiate with Activision and there’s a $3 billion breakup fee.

For a company that is ordinarily extremely buttoned up in an industry that’s full of secrets, the trial has been a rare window of transparency. Some of these documents have even been deleted and immediately redacted. In a world where companies craft narratives around their upcoming products and to suit market conditions, taking a peek into what they’re really thinking is invaluable. The next time a company pushes a product really hard, it’s always worth asking why.

Rebekah Valentine contributed to this report.