26 February 2024

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Call of Duty

Call of Duty negotiations are expected to resolve amicably; Sony requires COD, and Microsoft requires Sony

Based on key business figures’ assessments, testimony from Xbox CEO Phil Spencer, and a recently published bombshell email from Sony Interactive Entertainment CEO Jim Ryan, Sony is expected to sign a Call of Duty deal with Microsoft to ensure the $31 billion franchise remains on PlayStation.

Microsoft has stated that it wishes to maintain Call of Duty on the PlayStation, and Xbox Gaming CEO Phil Spencer’s recent testimony at a court hearing over the Activision merger lends credence to this claim.

The evidence hearing has been a windfall to anyone seeking knowledge about the Xbox company and the complicated, highly secretive inner workings of the video game industry. Spencer revealed crucial internal acronyms such as CSA (Consumer Solutions Area), GLT (Gaming Leadership Team), and PLA (Publisher’s Licencing Agreement) throughout the trial. Listeners also studied the foundations of the Activision merger plan.

Spencer testified that he and his colleagues developed a “deal model” for the acquisition of Activision Blizzard King. This model is part of a brief submitted to Microsoft’s top brass; in order to get an acquisition vetted and approved, Phil Spencer and his team must present a model to senior leaders such as Microsoft’s Chief Financial Officer Amy Hood, Chief Executive Officer Satya Nadella, Chief Operating Officer Satya Nadella, and the board of directors.

This transaction model includes items such as strategic and financial reasons with strategic and financial studies, a financial/economic model, asset value, and other pertinent information. The financial model will most likely represent the facts of purchasing Activision–cost structure, revenues, and so on.

We don’t know exactly what information the financial model (or the deal model) contains, but based on Spencer’s testimony, this model includes a breakdown of how Activision’s business would contribute to Xbox after the merger.

Call of Duty

A brief copy of one of the interactions between FTC lawyer James Weingarten and Phil Spencer regarding making Activision titles exclusive to Xbox is provided below. In the exchange, Spencer mentions that the current financial model is based on Activision games staying on PlayStation–including Call of Duty.

Q You’ve had conversations at Microsoft about skipping PlayStation with Activision titles, yes or no?

It seems like a normal conversation that we would have.

Q You have had those conversations?

I don’t remember specific conversations, but we would have had conversations about that, yes. I remember the result we came up with, which was the financial model that includes Activision games continuing to ship on PlayStation.

Microsoft’s top management approved of this model, and the offer was made. The takeover offer was presented to Activision’s board of directors, who authorised it, and the merger offer was approved by an overwhelming majority of Activision’s shareholders.

Elsewhere in the testimony, Phil Spencer discusses the process to Microsoft counsel Beth Wilkinson:

“We build a financial analysis to help us give a range of what we could afford to pay for a company and still feel like we have the right returns,” Spencer said.

The gaming CEO continues, saying that he is beholden to keeping his commitments based on the proposed deal model:

Microsoft’s top management approved of this model, and the offer was made. The takeover offer was presented to Activision’s board of directors, who authorised it, and the merger offer was approved by an overwhelming majority of Activision’s shareholders.

“I see it as critical to my job function to deliver on the results that I commit to the board and the company, and manage an effective and growing business, the commitments that I make to the board around the financial return of any acquisition, especially one of nearly $70 billion.”

One of these pledges is to keep Call of Duty on the PlayStation.

“My goal is to ship Call of Duty on all future PlayStation versions.” “I can’t say whether or not there will be future versions of PlayStation,” Spencer told FTC counsel.

Spencer defines what strategic and financial reasons are, and how they differ from one another, in a line of inquiry with the FTC’s James Weingarten:

Q The economic value is what is the near-term financial return to have to be to justify the valuation? Economic value is about what you pay for an asset, but it’s not the same as the strategic value?

Strategy rationale and financial rationale are two different discussions

Q It may be the case the asset has such strategic value it may outweigh economic value right?

We would be encouraged to find that strategic value in an economic model that we would be able to present. How does any opportunity relate to the strategy that we’re on, then financial analysis is the financial implication of us acquiring an asset. There isn’t a value on the strategy, it’s a strategic analysis, it’s more of a commentary on how this asset fits into the strategy that we have, there is no numeric value assigned. There is no value-to-value comparison between the two documents.

Aside from internal obligations and the deal-making process, Spencer claims that the financial impact of removing Call of Duty from PlayStation is too great. Taking Call of Duty as an Xbox exclusive would radically alter Activision’s valuation.

“The financials…the size of Call of Duty, the role it plays in the valuation of buying Activision, [it] would make it financially impossible for us to recover…for us to lose Call of Duty on its most important platform.” As we all know, PlayStation has many more players than Xbox. “There are a lot more Xboxes than PlayStations, and the game is very successful on both,” Spencer remarked.

In terms of Sony’s side of the negotiations, Spencer says the company “has to allow” Microsoft to release the game on their platform. It is not up to Microsoft to decide whether or not Call of Duty will be released on PlayStation. Sony must reach an agreement.

Activision’s Call of Duty franchise’s PLA, or Publisher Licencing Agreement, will expire in 2024. If Microsoft purchases Activision before that date, it will need to negotiate a new PLA with Sony in order to release Call of Duty on the platform.

When it comes to delivering its games on PlayStation, Microsoft typically enjoys a pleasant and profitable partnership with Sony. Spencer mentions Minecraft, one of the most successful video games ever created, as a game that has generated a solid financial collaboration between Xbox and PlayStation in his evidence.

“We have over 50 games on the PlayStation Store, some of which we acquired and some of which we launched.” We don’t have a publishing agreement or an arrangement on individual deals. It’s a friendly relationship. When we ship games, they are quite supportive,” Spencer remarked.

Typically, publishers and platform owners do not sign PLAs or other agreements for individual games. Call of Duty is unique. Microsoft has struck a franchise-specific agreement in which it commits to shipping Call of Duty with complete feature parity and day-and-date support on PlayStation for the next ten years.

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Sony on Call of Duty

“Sony is asking for significant commitments” in relation to the Call of Duty pact, according to Spencer. No specifics were provided because the agreement is expected to be under seal and declared confidential by the courts, but these pledges could include a longer guaranteed release cadence beyond 10 years, as well as a precise revenue split.

Activision was able to negotiate a very favourable revenue split with Microsoft by leveraging its better market position as the publisher of one of the best-selling franchises of all time. During the course of the dispute, the FTC may have inadvertently exposed an 80-20 split in Activision’s favour.

Activision has threatened to withhold the release of Call of Duty on Gen9 Xbox Series X/S consoles unless Microsoft agreed to its new amended revenue sharing conditions in an updated PLA agreement.

Call of Duty

PlayStation relies heavily on Call of Duty and Activision games. Sony has invested heavily in multi-year licencing partnerships that provide exclusive content to the PlayStation platform, and it has exploited third-party franchises to power its virtuous cycle business model. As Call of Duty grew in popularity, so did PlayStation, and the two have a strong symbiotic relationship in the console market.

Sony clearly has a financial motive to keep these games on its platform. Despite public resistance and court records, Sony Interactive Entertainment CEO Jim Ryan believes the combination does not constitute an exclusivity threat to the Sony platform.

Day 1 of the evidentiary hearing began with a bombshell email between Sony Interactive Entertainment CEO Jim Ryan and former PlayStation head Chris Deering, according to Microsoft lawyer Beth Wilkinson. Ryan stated in the email that he did not feel the Microsoft-Activision merger was “an exclusivity play,” and that he expected Call of Duty to continue on PlayStation “for years to come”:

“It is not an exclusivity play at all. They’re thinking bigger than that, they have the cash the make these moves. I’ve spent a fair amount of time of Phil and Bobby and I’m pretty sure we’ll continue to see Call of Duty on PlayStation for years to come. “We have some good stuff cooking. I’m not complacent, I’d rather that this didn’t happen, but we’ll be okay, we’ll be more than okay.”

Sony’s resistance in this case has been centred on the loss of Call of Duty, the franchise’s importance to the company, and Microsoft’s capacity and apparent purpose to withhold Activision-Blizzard games from PlayStation.

After all, Call of Duty is the best-selling franchise in PlayStation history, and it has been the best-selling game for 9 of the last 10 years. The franchise has produced over $31 billion in sales and sold over 425 million copies, and Modern Warfare 2 in 2022 set a new record for the largest-ever Call of Duty launch on PlayStation.

A glance at Activision-Blizzard’s financials reveals how vital PlayStation is for the publisher’s games. While we don’t have the specific data for Call of Duty, we can see how much money Activision games make on Sony’s platform.

Given these circumstances–Microsoft’s deal model with the Activision acquisition including Call of Duty’s perpetual release on PlayStation, the importance of PlayStation for Activision games and vice versa–it is likely that Microsoft and Sony will sign a mutually beneficial deal to continue offering Call of Duty on PlayStation.

Otherwise, Microsoft will have to change its internal business, and Sony will lose hundreds of millions of dollars in revenue each year, as well as significant million-player involvement across its PlayStation network. Both of these things are critical for Sony Interactive Entertainment, and it’s very probable that the firm will collaborate closely with Microsoft to reach an agreement.

Getting Sony to sign the pact may be difficult, but given the stakes, it is quite likely that Microsoft and Sony will reach an agreement. On a business, financial, and reputational level, Microsoft should do everything possible to secure Call of Duty for PlayStation platforms, and Sony has a direct incentive to secure Call of Duty to help foster revenues, engagement, and long-term spending across live services and franchise full game sales in its ecosystem.