1 1 2 FEDERAL TRADE COMMISSION 3 ---------------------------------X 4 In the Matter of: 5 MICROSOFT/ACTIVISION 6 ---------------------------------X 7 File No. 221-0077 8 9 10 *** HIGHLY CONFIDENTIAL *** 11 12 13 INVESTIGATIONAL HEARING 14 HELD REMOTELY 15 16 DATE: OCTOBER 11, 2022 17 TIME: 11:28 a.m. Eastern Time 18 WITNESS: PHIL SPENCER 19 20 21 22 23 24 Reported by: CANDIDA BORRIELLO 25 JOB NO. 6207032-001 2 1 2 A P P E A R A N C E S: 3 ON BEHALF OF THE FEDERAL TRADE COMMISSION: 4 Federal Trade Commission 600 Pennsylvania Ave., NW 5 Washington, D.C. 20580 (202) 326-3274 6 BY: JAMES WEINGARTEN, ESQ. MERRICK PASTORE, ESQ. 7 JOONSUK LEE, ESQ. TAYLOR ALEXANDER, ESQ. 8 MARIA CIRINCIONE, ESQ. NICOLE CALLAN, ESQ. 9 EDMUND SAW, ESQ. ETHAN GURWITZ, ESQ. 10 MICHAEL BLEVINS, ESQ. MICHAEL FRANCHAK, ESQ. 11 MEREDITH LEVERT, ESQ. CEM AKLEMAN, ESQ. 12 STEPHEN SANTULLI, ESQ. AMANDA LEIGH BUTLER, ESQ. 13 E-MAIL: jweingarten@ftc.gov mpastore@ftc.gov 14 jlee@ftc.gov talexander@ftc.gov 15 mcirincione@ftc.gov ncallan@ftc.gov 16 esaw@ftc.gov sfrankovsky@ftc.gov 17 egurwitz@ftc.gov mblevins@ftc.gov 18 mfranchak@ftc.gov mlevert@ftc.gov 19 cakleman@ftc.gov ssantulli@ftc.gov 20 abutler@ftc.gov 21 (Continued on next page.) 22 23 24 25 3 1 2 ON BEHALF OF MICROSOFT AND THE WITNESS: WILKINSON STEKLOFF LLP 3 2001 M Street, NW 10th Floor 4 Washington, D.C. 20036 (202) 847-4000 5 BY: BETH WILKINSON, ESQ. ANASTASIA PASTAN, ESQ. 6 ANTHONY P. FERRARA, ESQ. E-MAIL: bwilkinson@wilkinsonstekloff 7 apastan@wilkinsonstekloff.com aferrara@wilkinsonstekloff.com 8 - and - 9 WEIL, GOTSHAL & MANGES LLP 10 2001 M Street, NW Washington, D.C. 20036 11 (202) 682-7011 BY: ALEXANDRA M. AMPUDIA, ESQ. 12 MEGAN A. GRANGER, ESQ. E-MAIL: alexandra.ampudia@weil.com 13 megan.granger@weil.com 14 15 ALSO PRESENT: 16 17 DAVE WARFORD dave.warford@cb-bc.gc.ca 18 MATTHEW STATHEARN 19 matthew.strathearn@cb-bc.gc.ca 20 Canadian Competition Bureau 21 SAMUEL FRANKOVSKY, Paralegal 22 sfrankovsky@ftc.gov Federal Trade Commission 23 24 (Continued on next page.) 25 4 1 2 ALSO PRESENT: 3 JUDSON WHITE 4 Wilkinson Stekloff, LLP 5 DAVID SMUTNY davidsmutny@microsoft.com 6 Microsoft 7 SAM PAILCA spailca@microsoft.com 8 Microsoft 9 LINDA NORMAN lnorman@microsoft.com 10 Microsoft 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 1 P. Spencer - Highly Confidential 2 THE COURT REPORTER: We're now on 3 the record. 4 MS. WINKINSON: Good morning. 5 Beth Wilkinson on behalf of 6 Mr. Spencer and Microsoft. 7 We understand this is a remote 8 video recorded deposition and complies 9 with all the requirements, and we 10 agree that it's satisfactory. 11 P H I L S P E N C E R, 12 called as a witness, having been 13 duly sworn by a Notary Public, 14 was examined and testified as 15 follows: 16 EXAMINATION BY 17 MR. WEINGARTEN: 18 Q. Good morning, Mr. Spencer. My name 19 is James Weingarten. I'm an attorney with 20 the Federal Trade Commission, and I'm going 21 to be asking you some questions today. 22 You understand you're under oath 23 just as if you were in a court? 24 A. I do. 25 Q. And we're here today to hear your 6 1 P. Spencer - Highly Confidential 2 testimony. If your counsel wants to discuss 3 with you an issue about privilege, that's 4 fine, but otherwise you should not be having 5 any communications with anyone about your 6 testimony in this hearing. No looking up 7 information, unless we talk about it first. 8 No notes. 9 Is that understood? 10 A. Understood. 11 Q. Great. 12 What is the gaming leadership team? 13 A. The gaming leadership team are 14 the team of individuals that compose the 15 functions that are required to run the gaming 16 business -- 17 THE COURT REPORTER: You cut out. 18 Can you repeat that? 19 A. The gaming leadership team, the 20 group of individuals that run the individual 21 parts of the gaming business. 22 Q. And gaming leadership team is often 23 abbreviated GLT? 24 A. That's correct. 25 Q. Who's on the GLT? 7 1 P. Spencer - Highly Confidential 2 A. The individual names, is that what 3 you want? 4 Q. Yes, please. 5 A. Matt Booty runs our first-party 6 studios organization. Sarah Bond runs our 7 game development organization. Ashley 8 McKissick runs our platform team. We 9 currently have a vacancy for the individual 10 that would run our devices for our hardware 11 team. Dave McCarthy runs our operations 12 organization. And then we have our -- what 13 we call our corporate functions. Tim Stuart 14 runs finance. Linden Norman runs our legal, 15 what we call, CELA organization. Cynthia 16 Per-Lee, who's on leave right now, runs our 17 HR organization. My exclusive assistant Toni 18 Philbrick is on the gaming leadership team. 19 Joslyn Main is our Chief of Staff for the 20 leadership team. I will feel bad if I left 21 an individual out, but I think that is the -- 22 Kareem Choudhry runs our emerging technology 23 team as part of the gaming leadership team. 24 I think I got them all. 25 Q. Is David Hampton on the GLT? 8 1 P. Spencer - Highly Confidential 2 A. David Hampton is not on the -- that 3 will remind me, Jerret West is our head of 4 marketing who is on the GLT. David Hampton 5 works in Jerret West's organization. 6 Q. And are you the leader of the GLT? 7 A. Yeah, it's not really a term that 8 we would use a leader of the GLT, but, yes, I 9 am the most senior person and I run the 10 gaming business at Microsoft, so I am the 11 leader of the GLT. 12 Q. And are all those people on the GLT 13 direct reports to you? 14 A. They are not. Our corporate 15 functions of finance, HR and legal report up 16 to the central Microsoft functions. 17 Q. How often does the GLT meet? 18 A. We try to meet at least once a 19 week. I would say normally it would be two 20 times a week, with travel schedules sometimes 21 that gets disrupted, but that would be our 22 goal. 23 Q. And who sets the agenda for each 24 GLT meeting? 25 A. It is usually the Chief of Staff 9 1 P. Spencer - Highly Confidential 2 that collects the items that need to be 3 discussed from the different GLT members. 4 So, Joslyn Main was on the list that I listed 5 previously. And maybe just for 6 correspondence, since Joslyn has only been in 7 the role for a few months, the prior Chief of 8 Staff was somebody named Haiyan Zhang, that 9 might show up on some documents. 10 Q. And what's your understanding of 11 what kind of issues or items are appropriate 12 for discussion of the GLT level? 13 A. I'd say first and foremost our 14 decisions that we can make to enable the team 15 to make progress, so if there are things that 16 we can do to unblock or make decisions that 17 teams are waiting on, I think that's a 18 primary function. We also discuss personnel, 19 budget, profit-and-loss kind of financial 20 information at the GLT, and we will discuss 21 long-term or sometimes even near term 22 strategy discussions at the gaming leadership 23 team meetings. 24 Q. And are the items for discussion at 25 GLT items that to which a consensus has 10 1 P. Spencer - Highly Confidential 2 already been reached or items brought to GLT 3 so a decision can be reached? 4 A. I think it's both. We will have 5 certain decisions that are made that need to 6 be communicated to the GLT members so they 7 understand what decisions have been made so 8 they can plan. In other instances, items 9 will be brought to the GLT for closure on a 10 decision. 11 Q. And are you the ultimate 12 decision-maker? 13 A. Not in every case. Certain 14 instances it's more of a group decision. If 15 it's something that's, say, related 16 specifically to finance, I'll just use that 17 as an example, since Tim Stuart, our 18 financial leader, reports up to our Microsoft 19 CFO, Amy Hood, there are certain decisions 20 whether they're financially driven or 21 legally -- have legal implications where 22 central corporate functions inside of 23 Microsoft might have the final decision on 24 what decision we make. 25 Q. Okay. And in general, when it 11 1 P. Spencer - Highly Confidential 2 comes to -- strike that. 3 Other than the extent to which 4 central Microsoft functions have input or 5 decision-making over their discrete 6 functions, are you the final decision-maker 7 in gaming? 8 A. Yes. 9 Q. And to the extent there's a 10 decision-maker above you, is that Ms. Hood or 11 Mr. Nadella? 12 A. Or potentially Brad Chase, if it 13 were something that was legally focused. And 14 I would say maybe Kathleen Hogan who runs HR 15 for Microsoft, you could imagine certain 16 instances where HR has an umbrella role over 17 our decisions. 18 Q. Am I correct that there is a lot 19 of information that is presented at the GLT 20 to enable the leadership team to make 21 decisions? 22 A. Yeah. 23 Q. And that information can take a lot 24 of forms, including PowerPoints or Word 25 documents or strategy memos? 12 1 P. Spencer - Highly Confidential 2 A. Yeah, or even demonstrations on 3 certain instances, yeah. 4 Q. Okay. Is it your expectation that 5 the information that is presented at the GLT 6 level is accurate and honest to the best of 7 the ability to the people who are drafting it 8 and presenting it? 9 A. Yes. 10 Q. I want to talk to you about long 11 range planning. 12 Do you have a framework for 13 long-range planning in the gaming division? 14 A. We try to, I think our goal with 15 our -- I'll shorthand to LRP for long-range 16 plan, were to have a kind of three-year 17 vision of where our business is going. It's 18 probably a stretch to say we always adhere to 19 what -- 20 THE COURT REPORTER: I'm sorry. 21 Adhere to what? 22 A. I'd say it's probably a stretch to 23 say that our LRP always takes kind of the 24 same structure every year. 25 Q. And is there a timeline or a 13 1 P. Spencer - Highly Confidential 2 process each year for developing an LRP? 3 A. No. No, I think our LRP processing 4 and implementation is probably more ad hoc 5 than it should be. 6 Q. And is there documentation of the 7 LRP? 8 A. When we agree upon an LRP, we will 9 usually document that in some way, yes. 10 Q. How is the LRP documented? 11 A. I would say most instances where 12 we're building an LRP, it's in response to a 13 request from either the senior leadership 14 team at the company where we're presenting 15 our gaming status, potentially even a board 16 of directors meeting for Microsoft where 17 we're presenting our gaming status. 18 So, in many instances, I would say 19 our version of our LRP gets rolled in to a 20 presentation that we're giving on the overall 21 kind of trajectory of the gaming business 22 that might include more than just what's in a 23 traditional LRP document. 24 Q. And as you mentioned, it sounds 25 like that there's not a centralized set of 14 1 P. Spencer - Highly Confidential 2 long-range planning documents for the gaming 3 division that are updated annually; is that 4 correct or am I incorrect? 5 A. The annual process that we 6 definitely go through every year is our 7 fiscal year budgeting process. I think of 8 that as separate from our LRP because LRP 9 tends to span more than one year, but 10 definitely through -- kind of January through 11 May our fiscal year planning process is 12 something that we're very diligent in doing 13 because it rolls up to the company. And 14 sometimes as part of that, we adjust what we 15 think of as our LRP. 16 But kind of going back to my other 17 answer, I don't think we're as diligent as 18 having a one standard way of presenting or 19 cataloguing that information every year. 20 Q. So, to the extent that the gaming 21 division -- well, strike that. 22 Am I correct that whatever form it 23 takes, the gaming division does have 24 long-range plans, correct? 25 A. Yes. 15 1 P. Spencer - Highly Confidential 2 Q. And the form in which the 3 long-range plan is communicated or maintained 4 varies; is that right? 5 A. Yes. 6 Q. Okay. So, for example, one of the 7 forms in which the long-range plan is written 8 down could be a CSA strategy memoranda? 9 A. Yes. 10 Q. Okay. And another form in which 11 the long-range plan might be communicated or 12 written down as a presentation to the 13 Microsoft board of directors, correct? 14 A. Yeah. 15 Q. And in addition, it sounds like 16 long-range planning might be a little more ad 17 hoc in the sense that the plan might be 18 varied as needed without a central sort of 19 track being updated; is that right? 20 A. That's right. 21 Q. And just so the record is clear, a 22 CSA is a customer solution area at Microsoft; 23 is that right? 24 A. It is. You did a good job with 25 that one, yeah. 16 1 P. Spencer - Highly Confidential 2 Q. For those who are not familiar with 3 Microsoft lingo, is that like a division at 4 other companies, maybe? 5 A. Yeah. I think that's probably the 6 closest equivalent would be a division. 7 Q. Please, if you have a 8 ready-in-the-mind definition of a CSA at 9 Microsoft, please let me know. 10 A. Yeah, I think the slight difference 11 I might add is it's the customer part of the 12 customer solution area, we might have a 13 customer who doesn't relate -- who relates to 14 more than one division in the company. So, 15 if you took a customer solution area like 16 modern work, which is not where gaming 17 exists, but it's a good example, you could 18 imagine there's Windows components, there are 19 office components, there might be other 20 components in the company that relate to a 21 modern work customer solution area. So, it 22 could span what somebody might think of 23 Windows as a division and Office as a 24 division, just as an example, and you might 25 have customer solution areas that span our 17 1 P. Spencer - Highly Confidential 2 divisions. We try to make customer solution 3 areas not our org chart, but rather a focus 4 on the customer, and there's not always a 5 one-to-one correlation. 6 Q. For gaming, is gaming a CSA at 7 Microsoft? 8 A. Gaming is a CSA at Microsoft, yes. 9 Q. So, in the case of gaming, is it 10 fair to say that CSA concept in the org chart 11 are overlapping? 12 A. Yeah, yeah. In gaming's case they 13 are basically a one-to-one mapping. 14 Q. Okay. Going back for a second to 15 the long-range plan. We talked about CSA 16 memoranda briefly, we talked about 17 presentations to the board of directors. 18 Are there other kinds of work 19 product that you think of as sources for the 20 long-range plan of the gaming CSA? 21 A. Every year we try to publish a 22 strategy document to our team, to our 23 organization. That strategy document comes 24 from the gaming leadership team and gets 25 filtered down to the entire organization, and 18 1 P. Spencer - Highly Confidential 2 in presenting our annual strategy, a view on 3 long-term trends and our business trajectory 4 often shows up, maybe not as formal as what I 5 would call an LRP, but it would be another 6 view of where we see our business going that 7 gets presented internally to our 8 organization. 9 Q. And does that document have a name 10 or is it just referred to as the annual 11 strategy document? 12 A. Yeah, annual strategy document, 13 yes. 14 Q. And why do you send it to the 15 gaming organization on an annual basis? 16 A. Gaming organization is roughly 17 10,000 employees, and we're trying to provide 18 context for individuals as they're doing 19 their work for how their work fits into the 20 strategy that we have for our gaming 21 organization all up, so to give the employees 22 context for their work. 23 Q. And is it -- I think I've seen the 24 strategy documents, I think I've also seen 25 CSA memoranda. 19 1 P. Spencer - Highly Confidential 2 Do those often have substantial 3 overlap? 4 A. Yeah, yeah. We're pulling from one 5 to build another. I mean the -- yes, you'll 6 see a lot of commonality, that would be our 7 goal at least, between our strategy documents 8 and our LRP documentation and any long-term 9 strategy presentation that we're asked to 10 give. 11 Q. And is there a particular point in 12 the year when it's the practice of the GLT to 13 send out the annual strategy document? 14 A. We try to do it as close to the 15 beginning of Microsoft's fiscal year as we 16 can. Microsoft's fiscal year starts 17 July 1st, sometimes we're a little late, but 18 in the first quarter would be our goal. 19 Q. And before you send out the annual 20 strategy document to the gaming organization, 21 do you get buy-in on it from, let's say, 22 Mr. Nadella, Ms. Hood, the other corporate 23 leaders? 24 A. We do not. 25 Q. And the -- who contributes to the 20 1 P. Spencer - Highly Confidential 2 drafting of the annual strategy document? 3 MR. WEINGARTEN: Ms. Borriello, 4 can you hear me? 5 THE COURT REPORTER: Yes, I can. 6 Did I miss something? 7 "Who contributes to the drafting 8 of the annual strategy document?" 9 MR. WEINGARTEN: Yes, and then I 10 think I lost Mr. Spencer? 11 THE COURT REPORTER: Let's go off 12 the record. Is that okay? 13 MR. WEINGARTEN: Yes, please. 14 THE COURT REPORTER: We're off the 15 record. 16 (Off-the-record discussion was 17 held.) 18 THE COURT REPORTER: We're back on 19 the record. 20 MR. WEINGARTEN: Could you read 21 back the last question? 22 (Referred to portion of the record 23 was read back by the court reporter.) 24 A. The project management of getting 25 the document created is done by our central 21 1 P. Spencer - Highly Confidential 2 strategy team led by David Hampton. All of 3 the gaming leadership team contributes to 4 the, kind of, goals and outcomes that are put 5 in the document itself. 6 Q. And is it fair to say the annual 7 strategy document constitutes the gaming 8 leadership team's best thinking about the 9 gaming CSA strategy for that particular year? 10 A. Yeah. 11 Q. And what are some of the general 12 areas or topics that are included in the 13 strategy documents? 14 A. We usually try to pick three 15 sometimes more, but at least three discrete 16 areas of focus for the organization in the 17 given fiscal year along with some metrics 18 that we will use to gauge our success over 19 the year that -- those are the kind of things 20 that are usually included in the strategy 21 document. 22 Q. Do you discuss competitors in the 23 strategy document? 24 A. In the document it goes out to the 25 organization. There might be some framing 22 1 P. Spencer - Highly Confidential 2 based on some competitive data or 3 information, but I would say the focus of the 4 document itself is on the work that we would 5 be doing and the outcome that we're trying to 6 drive through that work. 7 Q. And in terms of outcome, you 8 mentioned the document -- the strategy 9 document includes metrics, correct? 10 A. Yeah. 11 Q. And those are metrics by which you 12 and the gaming leadership team are judging 13 the organization's success or failure each 14 year? 15 A. I would include the gaming 16 leadership team and who we're evaluating as 17 well. So, yes, the organization and 18 ourselves frankly in making progress in that 19 year. 20 Q. And you communicate those metrics 21 to the organization so that everyone in 22 gaming is aligned on what the important 23 metrics are for the coming year? 24 A. That's right. 25 Q. What is your role in particular 23 1 P. Spencer - Highly Confidential 2 with respect to long-range planning as sort 3 of we've been discussing it? 4 A. As the head of gaming, I think my 5 biggest role two -- may be two facets, one is 6 working with Amy Hood and the company on what 7 financial profile the gaming business needs 8 to kind of deliver in the next fiscal year, 9 maybe at a net revenue level and a profit 10 level. So, getting agreement, working with 11 Tim Stuart and Amy Hood and Satya to some 12 extent, Satya tends not to get as close to 13 that information. Once we have agreement on 14 that, it -- it's really thinking about and 15 discussing what specific priorities we want 16 to have for the next 12 months with the 17 likelihood of can we, you know, gauging 18 against the likelihood of us making progress 19 in some specific areas over the next 20 12 months. I say 12 months because the 21 strategy document is specific to 12 months, 22 so it might not encapsulate where we think 23 the business is in five years, it's really 24 the work that we're gonna do in the next 25 12 months and the progress that we want to 24 1 P. Spencer - Highly Confidential 2 make. And if we need to make trade-offs or 3 just make decisions on where our priorities 4 would be, I would be part of that 5 decision-making. 6 Q. How often do you meet with Ms. Hood 7 regarding the gaming CSA? 8 A. Maybe two or three times a year 9 with the most concentration during the spring 10 as we're landing on our fiscal year for a 11 plan for the following fiscal year, that 12 would be more one-on-one or Tim Stuart 13 directly with Amy and I and maybe Jerret 14 West, who's our head of marketing. 15 Obviously, any senior leadership 16 team meeting I'm in for the company, Amy is a 17 peer at that group, so I would see her often, 18 but not necessarily to discuss the gaming CSA 19 specifically. 20 Q. And aside from regular one-on-ones 21 that you just described, you're also in 22 communication with Ms. Hood about gaming over 23 e-mail or other media? 24 A. Yeah, we do have a regular weekly 25 meeting that the company runs on evaluating 25 1 P. Spencer - Highly Confidential 2 our consumer businesses and how our metrics 3 are going, how we're tracking against metrics 4 across any of our consumer businesses inside 5 the company, and we are on a kind of rotating 6 schedule as the gaming board to show up and 7 present and usually think of it as a 8 15-minute presentation of here are the 9 metrics that we're tracking and how we're 10 tracking against those metrics. It's a 11 longer list of metrics than are in that 12 strategy document, so Amy's in that, Satya's 13 in that. I'm going to guess that meeting has 14 40 or 50 people in it, so the meeting is not 15 a one-on-one meeting with Amy to go over 16 those present- -- that -- how we're making 17 progress, but her and Satya would see those 18 updates as we're presenting at the consumer 19 -- the consumer meeting on a weekly basis 20 when it's our turn. 21 Q. And does that meeting have a title, 22 is it just called the consumer meeting? 23 A. It does have a title and it's not 24 the consumer meeting. Sitting here, I'm not 25 remembering exactly what it's called. I know 26 1 P. Spencer - Highly Confidential 2 it's Thursdays at 2:30, it's a 30-minute 3 meeting. But I apologize, I don't 4 specifically remember the title. 5 Q. And that's a different meeting than 6 what might be called the SLT meeting? 7 A. Yes, SLT meetings in general are on 8 Friday. 9 Q. How often does the SLT meet? 10 A. Every Friday, outside of holidays. 11 Q. How often is it that gaming's turn 12 comes around in these Thursday consumer 13 meetings to present? 14 A. I would say on average probably 15 every four weeks, so once a month. 16 Q. In your role as leader of the 17 gaming CSA, you interact a lot with 18 Mr. Stuart? 19 A. I do. 20 Q. Does he have a dotted line to you 21 or just a line to Ms. Hood? 22 A. He actually reports to a gentleman 23 named Bill Duff who reports to Amy Hood, so 24 Tim is not a direct report of Amy's. I 25 wouldn't say Tim has a dotted line to me. I 27 1 P. Spencer - Highly Confidential 2 have no direct management responsibility for 3 him, but he is a partner in running the 4 business. 5 Q. And when you say "partner in 6 running the business," can you please expand 7 on that? 8 A. Yeah, I would -- 9 Q. Let me -- how is he a partner in 10 running the business? 11 A. As the CFO, he's responsible for 12 our integration and coordination with 13 Microsoft central finance function, both the 14 requirements on us as a business bringing 15 those back to us, negotiating on our behalf 16 in certain instances, doing the necessary 17 work on, I would say, earnings calls. He 18 runs point on that with Amy Hood's 19 organization for investor relations and that 20 kind of work. And that's examples of work 21 that I'm not that closely associated with 22 where Tim is the person who's on point to 23 deliver those -- that kind of coordination 24 with the rest of the company itself. 25 Q. How often do you communicate with 28 1 P. Spencer - Highly Confidential 2 Mr. Stuart? 3 A. Daily. 4 Q. You think he's reliable? 5 A. Yeah. 6 Q. Smart? 7 A. Yeah. 8 Q. You trust the information that he 9 provides to you? 10 MS. WINKINSON: Can I interrupt 11 for one second? 12 Mr. Spencer, can you just say 13 "yes" instead of "yeah" for the 14 transcript? 15 THE WITNESS: Yes, I apologize. 16 Q. That's okay. 17 You trust the information he gives 18 to you? 19 A. I do. 20 Q. You mentioned Mr. Hampton reports 21 to Mr. West. 22 Do you also consider Mr. Hampton a 23 partner in the business? 24 A. Mr. Hampton provides an important 25 function for our organization, he's not part 29 1 P. Spencer - Highly Confidential 2 of the decision-making team in making 3 decisions for the business, so I wouldn't 4 equate his contribution with Tim's 5 contribution, Tim Stuart's contribution, but 6 clearly he's an important part of us running 7 our organization, yes. 8 Q. Is Mr. Hampton reliable? 9 A. Yes. 10 Q. Smart? 11 A. Yes. 12 Q. Do you trust the information that 13 he puts together for the gaming business? 14 A. I do. 15 Q. You mentioned the decision making 16 team. When you're using that term just now, 17 who do you have in mind as the 18 decision-making team? 19 A. The gaming leadership team. 20 Q. Stepping aside from long range 21 planning for a second, the transaction 22 process at Microsoft, I understand there 23 are -- well, strike that. 24 Is there a framework that gaming or 25 Microsoft employs as part of the process to 30 1 P. Spencer - Highly Confidential 2 decide whether and how to acquire another 3 company? 4 A. Yes, there is. 5 Q. Okay. And for example, is seeking 6 strategy approval one of the components of 7 that process? 8 A. Yes, it is. 9 Q. And is seeking approval to 10 negotiate or A2N another component of that 11 process? 12 A. Yes, it is. 13 Q. Can you -- including those things 14 and any others, can you just give me the 15 overview please of the acquisition process as 16 you understand it? 17 A. I think that encapsulates the 18 formalized process that I'm aware of at the 19 company for acquiring other companies is 20 getting strategic approval prior to 21 discussing financials or negotiating. Once 22 you have strategic approval moving to -- 23 approval to negotiate based on the financials 24 and then obviously engaging with the company 25 that you're looking to acquire with our 31 1 P. Spencer - Highly Confidential 2 corporate development function that is part 3 of Amy Hood's organization. 4 Q. And are there -- do different 5 transaction sizes require different people to 6 give strategic approval? 7 A. Yes. 8 Q. For what size transaction are you 9 able to give strategic approval without 10 seeking approval from anyone above you in the 11 Microsoft chain? 12 A. This is from memory as I use -- the 13 process basically dictates when I can or 14 cannot approve. My memory says that I can 15 approve up to $50 million acquisition as -- 16 that's kind of my authority in approval. 17 Q. And above that level, whose 18 approval is required? 19 A. I believe that depends on how far 20 above, that there is a certain level of 21 approval that would go to Amy and Satya above 22 50, again, this is from memory, I might have 23 the numbers wrong, but I think this is right. 24 Then at a certain level, it needs to go to 25 the board for approval. I don't remember 32 1 P. Spencer - Highly Confidential 2 what the cutoff is when you have to get board 3 approval for a certain acquisition. 4 Q. And is it the same cutoffs for 5 approval to negotiate? 6 A. Sorry. All of that was approval to 7 negotiate. The strategic approval is about 8 the strategic thesis behind the partnership 9 and doesn't include financials. These are 10 generalizations, but the strategic approval 11 should be an evaluation of the kind of 12 strategic synergy between the company that 13 we're looking at and Microsoft. So, a 14 financial approval for SA is kind of a tough 15 line to draw, but obviously you have to have 16 some idea about what range this acquisition 17 might land in, that would help drive who 18 would approve at certain level. 19 Q. Turning away from that. Is it fair 20 to say that the gaming CSA strategy continues 21 to be an emphasis on content, community and 22 cloud? 23 A. Sorry, it distracted me when 24 somebody came on. Can you repeat that? 25 Q. Sure. 33 1 P. Spencer - Highly Confidential 2 Is it fair to say that the gaming 3 CSA's strategy continues to be an emphasis on 4 content, community and cloud? 5 A. Content, community and cloud was an 6 encapsulation of certain parts of the 7 strategy. We don't often talk as a gaming 8 leadership team as we're building our 9 strategy and the terms of content, community 10 and cloud. So, I actually wouldn't say that 11 it's accurate to say that our strategic 12 thesis is around content, community and 13 cloud. I think we're probably looking more 14 at trends in the market and our capability. 15 Q. So, the phrase or framing content, 16 community, cloud has been deployed as part of 17 the gaming CSA communications, correct? 18 A. Yes, it has. 19 Q. Okay. And so, what is meant to be 20 communicated in your mind when gaming CSA 21 documents or personnel speak about content, 22 community, cloud? 23 A. Content, community, cloud was a 24 framing that was or is a framing from a few 25 years ago when we were thinking about trends 34 1 P. Spencer - Highly Confidential 2 in the gaming industry and what capabilities 3 we would need to have in order to be -- to 4 participate in gaming's transformation, and 5 we use the framing of the three Cs, content, 6 community and cloud, as shorthand for that 7 transformation. 8 Q. And has a new framework or framing 9 replaced content, community, cloud? 10 A. I think parallel you would see 11 phrases like putting the customer at the 12 center, going from device centric to customer 13 centric. These I would say are parallel 14 constructs to content, community and cloud 15 that try to articulate the transitions we see 16 the gaming industry going through, and 17 content, community and cloud would be one of 18 those, but not the only one. If you looked 19 at our strategy documents, I think you would 20 see many of these phrases show up, sometimes 21 all of them, sometimes one or the other, 22 really thinking about in trying to clearly 23 communicate what our strategy is and maybe 24 even what our priorities are at this moment. 25 Q. So, is it fair to say that content, 35 1 P. Spencer - Highly Confidential 2 community, cloud continues to be an accurate 3 description of the capabilities or offerings 4 that the gaming CSA is working towards? 5 A. In the long run, we seek content, 6 community and cloud to be important 7 components of the gaming platform that we're 8 trying to build, yeah. Yes. 9 Q. I've also seen reference to Xbox as 10 an ecosystem. 11 What does that mean, "ecosystem," 12 in this context? 13 A. Without the context of actually 14 where you saw it, I might just say Xbox as a 15 place where our customers invest their time 16 and money. 17 Q. Okay. Fair that the ecosystem 18 includes the Xbox console products? 19 A. It includes the console, but not -- 20 it's not exclusive to the console. 21 Q. Does the Xbox ecosystem include 22 Xbox products that are available on PC? 23 A. Yeah. 24 Q. And does the Xbox ecosystem include 25 Game Pass? 36 1 P. Spencer - Highly Confidential 2 A. Yes. 3 Q. Does the Xbox ecosystem include 4 xCloud? 5 A. Yes. 6 Q. And does it include the hardware 7 that is necessary to access Xbox products and 8 services? 9 A. Can you give me an example of that? 10 Q. Sure. Like a cloud, does the 11 ecosystem include a Microsoft cloud access 12 device? 13 A. The thing that a consumer might use 14 to access the game in the cloud, yes. 15 Q. I want to talk a little bit about 16 content. 17 What -- have you heard the term 18 "AAA title" with respect to video game 19 content? 20 A. I have. 21 Q. Okay. What is a AAA title? 22 A. I wouldn't say there's an industry 23 definition for what AAA actually means. I 24 think the notion of a AAA game is a game with 25 a high development budget with presumably a 37 1 P. Spencer - Highly Confidential 2 high expectation for -- for sales and kind of 3 splash when it launches. 4 Q. And I appreciate you said that's a 5 notion. Is that your notion of what a AAA 6 title is? 7 A. Yes. 8 Q. So, if we were to list the features 9 or characteristics of a AAA title, one is 10 high development cost; is that fair? 11 A. Yes. 12 Q. Any others? 13 A. The one I added was, which I think 14 would hold, is prior to launch a high 15 expectation for the market reception to the 16 game. 17 Q. And when you say "market 18 reception," do you mean revenues? 19 A. Yeah, players and revenue. Yes, 20 number of players, how much revenue the game 21 would drive. 22 Q. What are some common -- when you 23 think of a AAA title, what are some AAA 24 titles you think of? 25 A. I would -- I think of games like 38 1 P. Spencer - Highly Confidential 2 FIFA from Electronic Arts, I think of -- in 3 the last year, Elden Ring by from 4 FromSoftware. I would look at -- from Sony, 5 say, the upcoming God of War Ragnarok as a 6 AAA game. From us, I would look at a game 7 like Halo as a AAA game. I would consider 8 Call of Duty a AAA game. From Nintendo, I 9 would say a game like the next Zelda is a AAA 10 game. 11 Q. And would you agree that there are 12 relatively few AAA titles relative to the 13 total number of titles in gaming? 14 A. AAA titles are definitely a 15 minority in terms of the overall titles that 16 are launched in a given year, yes. 17 Q. What percentage of title launches 18 in a particular year are AAA titles? 19 A. I don't know. 20 Q. Do you have any sense at all of the 21 proportion of AAA -- strike that. 22 How many AAA games do you think 23 come out in a given year, in your experience? 24 A. I would say there's -- there are 25 probably 10 to 20 AAA games in a given year, 39 1 P. Spencer - Highly Confidential 2 calendar year. 3 Q. And how many games, let's say, 4 console, how many console games do you think 5 launch -- titles launch in a given year, give 6 or take? 7 A. 300, 400. 8 Q. And if I use the term "base sales" 9 for a game, do you have an understanding of 10 what that means? 11 A. Yes. 12 Q. What does base sale mean? 13 A. Base sales is usually used to 14 represent the retail sales of the full game 15 either through digital or at physical retail. 16 Q. In addition to base sales, there's 17 also a revenue stream called post-sale 18 monetization; is that right? 19 A. There is post-sale monetization. 20 You said in addition to, I would say the 21 largest games are free-to-play games that 22 only have post-sale monetization, so in that 23 instance it wouldn't be an addition to base 24 sales, it would just be post-sale 25 monetization. 40 1 P. Spencer - Highly Confidential 2 Q. So, with respect to video games, 3 there are two potential revenue streams, base 4 sales and post-sale monetization, and games 5 have a different mix of either of those 6 things; is that fair? 7 A. No, there -- there are many -- 8 well, many, you have subscription-based games 9 if you think about MMOs, which might also 10 include post-sale monetization, some of those 11 could include a base sale as part of getting 12 into the subscription or not, some of them 13 might be free-to-play with a subscription. 14 You're seeing a growing segment of games that 15 monetize through advertising where you play 16 for a certain amount of time and an ad is 17 presented in front of you. 18 But I think when we look at the 19 business model of video games today, there 20 are multiple business models that work at 21 scale, meaning sizable revenue streams, for 22 different types of games. 23 Q. Thinking about all those different 24 kinds of revenue streams together, I think 25 you had said that there were about 10 or 20 41 1 P. Spencer - Highly Confidential 2 AAA titles a year, out of maybe 3- or 400 3 that are launched for console. 4 What proportion of the revenues, 5 those 3- or 400, do you think those AAA 6 titles make up? 7 A. The largest revenue streams at 8 least on the platforms that we have 9 visibility into are free-to-play games, so 10 when you think about -- 11 THE COURT REPORTER: I'm sorry. 12 When you think about what? 13 A. When you think about gaming as an 14 industry all up, the largest revenue stream 15 would be free-to-play titles, and 16 free-to-play is the largest revenue streaming 17 gaming today, so in the vocabulary that we 18 were using that would be post-sale 19 monetization drives the majority of the 20 revenue in the video game business today. 21 Q. Are AAA titles free-to-play? 22 A. In the way the game -- there is not 23 a precise definition for AAA games, which is 24 why I kind of said through my lens, here's 25 how I talk about it. From a definition of 42 1 P. Spencer - Highly Confidential 2 how much money is spent to run a large 3 free-to-play game like a Fortnight or a 4 Roblox, they would look like a AAA game from 5 just like from an Excel spreadsheet. This is 6 why I talked about the anticipation towards 7 launch that free-to-play games tend to launch 8 a little differently, so there's not a firm 9 definition of what AAA means. I would -- I 10 would say free-to-play games are AAA. 11 Certain free-to-play are AAA, but I would not 12 say there's a common agreement on that across 13 the gaming industry, whether a game like 14 Roblox is actually AAA or not. 15 Q. And why not, why wouldn't there be 16 common agreement that Roblox is AAA? 17 A. Like in many entertainment 18 industries, you have history of what is a 19 blockbuster movie, can a blockbuster movie 20 launch on Netflix or not, and you get kind of 21 different opinions on this. I think as 22 business models transform and distribution 23 transforms, some of these terms are pulled 24 from a prior, kind of, view or even reality 25 in an industry and fail to accurately reflect 43 1 P. Spencer - Highly Confidential 2 what's happening in the market today. And my 3 opinion would be that AAA is one of those 4 kind of terms. 5 Q. What -- thinking about console 6 games -- strike that. 7 Free-to-play as a model for games, 8 is there a platform on which free-to-play is 9 more prevalent? 10 A. Free-to-play -- the largest games 11 on almost any platform, including console, 12 are free-to-play games. A majority of 13 monetization on mobile are free-to-play, but 14 the largest monetization games on console are 15 usually free-to-play, and PC as well. 16 Q. And so, the 10 or 20 AAA titles 17 that we estimated may be launched in a given 18 year, how many are on the free-to-play model? 19 A. I'll struggle a bit, I'm not trying 20 to be difficult in the -- again, what does 21 AAA actually mean. When I was answering the 22 question on 10 to 20 AAA, I was answering 23 through the lens of a game that was highly 24 anticipated with a high dev budget, a high 25 marketing budget. And I would say that I 44 1 P. Spencer - Highly Confidential 2 don't have a good answer for how many games 3 in a given year are free-to-play AAA games, I 4 don't. Maybe -- I'm kind of making up a 5 number, it's much easier to apply tags to 6 games after they launched and you've seen 7 them be successful, and then people would 8 obviously talk about a game as being AAA. 9 But prior to launch, I think it's really an 10 unknown, it's a variable up to the publishers 11 on the business models they're gonna use for 12 their games. So, it's hard to gauge how many 13 would be free-to-play and not free-to-play. 14 Q. When you think about the AAA games 15 and the characteristics that we talked about, 16 high development cost and high expectation 17 from market reception, right, when you think 18 about that set of games, what percentage of 19 gaming revenue comes from those games? 20 A. On what platform? 21 Q. Let's start with console. 22 A. I don't have the specific number in 23 front of me, so to say what percent of our 24 annual revenue comes from retail AAA games, 25 if I add that term, I apologize, I don't have 45 1 P. Spencer - Highly Confidential 2 the number. 3 Q. Do you have any sense of the 4 proportion of AAA game contribution to 5 console gaming revenues? 6 A. When I look at our Xbox revenue, I 7 sort by revenue and not -- there's no Excel 8 kind of table for AAA, and when I'm looking 9 at the largest -- 10 THE COURT REPORTER: I'm sorry. 11 There was a lag. The largest what? 12 A. The largest monetized games on our 13 platform, most of them are free-to-play. So, 14 I don't often or ever take a cut of the data 15 looking at AAA versus non-AAA. I just look 16 at the top revenue-generating games on the 17 platform, and I'm just sharing that most of 18 those are on an annual basis are 19 free-to-play. 20 Q. Okay. What are the top five games 21 that you're thinking of there when you're 22 thinking of top revenue-generating games? 23 A. Roblox or Fortnight or Warzone, 24 Call of Duty: Warzone game. Games like Fall 25 Guys, games like Apex Legends. These are 46 1 P. Spencer - Highly Confidential 2 large free-to-play games that drive a lot of 3 revenue on our platforms. 4 Q. Okay. My question wasn't just 5 about free-to-play in your top five, your top 6 five overall in terms of revenue. 7 A. Yeah. That's what I'm -- the top 8 five is heavily weighted towards free-to-play 9 games. So, that was not a cut on 10 free-to-play games, that was games in the -- 11 in the last year, I would put Elden Ring into 12 that list, which was a more traditional-base 13 game sales, really no post-sale monetization, 14 that game sold very well last year. But on a 15 recurring basis, the other games that I 16 listed are the ones that I see at the top of 17 our sales charts most often. 18 Q. And are you thinking of -- is that 19 purely in terms of console or overall, all 20 platforms? 21 A. Free-to-play is more predominant on 22 PC and mobile. I don't have any insights 23 into mobile, really only Apple and Google do. 24 But if I look at stats like App Annie's and 25 other third-party data sites, most of your -- 47 1 P. Spencer - Highly Confidential 2 really all of your mobile games at scale are 3 free-to-play. And that's for the most part 4 true on PC as well that free-to-play is the 5 biggest revenue stream on PC and mobile. 6 Q. And what about on console? 7 A. Yeah, free-to-play is -- we could 8 look at the numbers and they shift around in 9 launch weeks or even launch months of given 10 games. But when I look at an annual basis of 11 the top revenue generating games on our 12 platform, ignoring business model and just 13 look at the revenue, a majority of the top 14 games are -- happen to be free-to-play games. 15 Q. So, what are your top five games in 16 your mind for console in terms of revenue? 17 A. Those are the ones I was listing 18 before, those are the games that when I think 19 about Xbox console, our largest revenue 20 generating games are games like Fortnight, 21 Apex, Roblox. As I said, Elden Ring did very 22 well last year, was a new IP launch. But 23 those are the games that are driving a 24 majority of the revenue on our platform. 25 There are retail games like FIFA does very 48 1 P. Spencer - Highly Confidential 2 well on our platform through post-sale 3 monetization and base game sales on our 4 platform. But the annual games kind of -- 5 that would be the collection that I would see 6 on console. 7 Q. When you're thinking about AAA 8 games, would you agree that generally they're 9 based on intellectual property that was 10 developed some time ago? 11 A. Yeah, I would say there's a fair 12 degree of new IP creation in our industry in 13 any given year. 14 Q. So, it's not your sense that AAA 15 games are largely monetizing IP though as 16 first developed ten plus years ago? 17 A. I -- I would agree that if you 18 looked at large base game sale console games 19 that there are many games that have regular 20 release cadences or have released in the past 21 that are selling well, yes. 22 Q. And my question was that those 23 franchises are based on intellectual property 24 or franchises that were developed ten plus 25 years ago? 49 1 P. Spencer - Highly Confidential 2 A. I honestly have never thought about 3 when the IP was originally created, so I'm 4 taking a second. But if we said of the large 5 base game sales on our console that have -- 6 where it's not new IP, was most of that IP 7 created over ten years ago? I guess that's 8 true. I honestly haven't really thought 9 about a cut on the data that way, but just 10 kind of doing it off the top of my head, I 11 think that -- I guess that's true. 12 Q. Okay. Well, let's see if I can 13 maybe help refresh your recollection on that. 14 MR. WEINGARTEN: Can we introduce 15 an exhibit that we've premarked as 16 PX1063? I gather this is supposed to 17 now appear in some kind of Box 18 platform that we have. 19 (Exhibit PX1063, E-mail chain, 20 Bates MSFT-2R-03228566, was 21 introduced.) 22 THE WITNESS: I'm told I have 23 to -- 24 (Cross-talk.) 25 THE WITNESS: I now have a folder. 50 1 P. Spencer - Highly Confidential 2 No, I don't. I'm not seeing anything 3 in the Box. 4 MR. WEINGARTEN: We might be 5 having a connectivity issue. Let's go 6 off the record if we can. 7 THE COURT REPORTER: We're off the 8 record. 9 (Off-the-record discussion was 10 held.) 11 THE COURT REPORTER: We're back on 12 the record. 13 BY MR. WEINGARTEN: 14 Q. Mr. Spencer, you've been looking at 15 PX1063, correct? 16 A. Sorry. Just 'cause I'm new to 17 this, is there a way for me to validate -- 18 oh. 19 Q. Yeah, there's a number -- let me -- 20 hold on. Let me stop you right there so we 21 don't talk over and I apologize for 22 interrupting, just so it's clear. 23 You'll see a lot of documents 24 today, they'll have what we call Bates 25 stamps, which is a very long string of 51 1 P. Spencer - Highly Confidential 2 numbers that we use to identify documents. 3 You'll also see PX numbers which is an 4 additional stamp we've applied to help keep 5 track of things as we talk about them. 6 So, if we look in the right-hand 7 corner, you should see PX1063. 8 You see that? 9 A. I do, thank you. 10 Q. And I will try to refer to those PX 11 page numbers, so it's -001, 002 and so on. 12 A. Thank you. 13 Q. So, you've looked at PX1063, 14 correct? 15 A. I have. 16 Q. And it's an e-mail chain that 17 starts between you and Ms. Bond, but further 18 down the chain includes you and several other 19 Microsoft executives, correct? 20 A. I would say chronologically, my 21 mail was the initial mail and the exchange 22 between Sarah and I came afterwards. 23 Q. I'm sorry. Yes, that's right. 24 So, your initial e-mail starts on 25 page PX1063-002, and it's dated March 24, 52 1 P. Spencer - Highly Confidential 2 2020. 3 Do you see that? 4 A. I do. 5 Q. And the subject line is, Friday's 6 outside-in Take-Two, correct? 7 A. Yeah. 8 Q. And it's an e-mail from you to 9 Mr. Nadella, Ms. Hood and several other 10 senior leaders either in gaming or at 11 Microsoft, right? 12 A. Yes. 13 Q. And the first sentence references 14 Friday's SLT. 15 Does that mean strategic leadership 16 team? 17 A. Yes, it does. 18 Q. Okay. And it refers to something 19 called an outside-in. 20 What is an outside-in? 21 A. An outside-in is a part of our 22 Friday SLT meetings where we bring an outside 23 company, whether it's a partner or potential 24 partner to talk to Microsoft senior 25 leadership team about their view on Microsoft 53 1 P. Spencer - Highly Confidential 2 as a partner for them. 3 Q. And the outside-in that you're 4 referring to in this e-mail is with a 5 publisher called Take-Two, correct? 6 A. That's correct. 7 Q. And Take-Two is a AAA publisher, 8 correct? 9 A. Take-Two has games across many 10 different business models. 11 Q. Okay. Well, let's look at page 003 12 of the document, the first full paragraph. 13 Do you see the one that starts, Over the past 14 five to seven years? 15 A. Yes. 16 Q. And you wrote: 17 Over the past five to seven years, 18 the AAA publishers have tried to use 19 production scale as their new moat. Very few 20 companies can afford to spend the 21 $200 million an Activision or Take-Two spend 22 to put a title like Call of Duty or Red Dead 23 Redemption on the shelf. 24 Did I read that right? 25 A. You did read that right. 54 1 P. Spencer - Highly Confidential 2 Q. So, in the first sentence of that 3 paragraph, you reference AAA publishers and 4 then you say: 5 Very few companies can afford to 6 spend the $200 million an Activision or 7 Take-Two spend. 8 So, in that paragraph, you're 9 referring to Take-Two as an example of a AAA 10 publisher, correct? 11 A. I'm referring to Take-Two as a 12 publisher of AAA games, but not making them 13 exclusively a publisher of AAA games. So, 14 looking at it backwards that if you said, of 15 the AAA games that are launching, Take-Two is 16 a publisher of AAA games. 17 Q. Okay. Is that what you meant when 18 you wrote in that first sentence "the AAA 19 publishers," that is a publisher who 20 publishes AAA games? 21 A. It is, yes, a publisher of the AAA 22 games that launch, trip- -- Take-Two is one 23 of the publishers of AAA games. 24 Q. And Activision is also a publisher 25 of AAA? 55 1 P. Spencer - Highly Confidential 2 A. Activision is also a publisher of 3 AAA games, yes. 4 Q. And that's what you meant when you 5 wrote, so Activision is a -- strike that, 6 Activision is a AAA publisher in that meaning 7 when you wrote those words there? 8 A. I'm not trying to argue, I'll just 9 say the fact that an Activision or Take-Two 10 publishes AAA games does not mean that they 11 are only a AAA publisher. So, I would not 12 apply the qualifier for a segment of their 13 portfolio to the entire publisher. 14 Q. Understood. 15 Is there anyone -- strike that. 16 When you use the term "AAA 17 publisher," do you ever mean in a company 18 that only publishes AAA games? 19 A. I don't know. 20 Q. Can you think of a publisher of 21 videos games who only publishes AAA games, or 22 does everyone have some mix of AAA and 23 non-AAA? 24 A. I think -- I don't believe 25 everybody has a mix. Sony doesn't really 56 1 P. Spencer - Highly Confidential 2 have a mix of AAA and non-AAA games. 3 Publishers like Activision and Take-Two just 4 publish many games across many different 5 business models. So, I just think it's 6 incorrect to use a single qualifier on the 7 kind of game publisher that they are. 8 Q. So, what did you mean -- were you 9 incorrect when you wrote AAA publisher then? 10 A. There are a certain number of AAA 11 games that are published every year and those 12 AAA games that come out come from a handful 13 of publishers, but that does not mean that 14 those publishers only published AAA games. 15 So, I'm just pushing back a little bit on 16 using that qualifier to somehow say that that 17 is the totality of what that publisher does. 18 I don't believe that's accurate. 19 Q. Okay. So -- 20 A. So, you would say the publishers of 21 AAA games. 22 Q. In this first sentence there you 23 wrote: 24 Over the past five to seven years, 25 the AAA publishers have tried to use 57 1 P. Spencer - Highly Confidential 2 production scale as their new moat. 3 What does the word "moat" mean in 4 that context? 5 A. In this context, it's try to create 6 a challenge for other games to compete with 7 their games. 8 Q. And I think -- is it fair to say 9 that this paragraph is talking about one of 10 the features of AAA games you had mentioned 11 earlier, i.e., high development costs? 12 A. Yes. 13 Q. And if you look two paragraphs 14 down, do you see the paragraph that starts, 15 In the new world where AAA publisher, do you 16 see that? 17 A. Yes. 18 Q. So, this goes back to some of the 19 questions I was asking you before the break. 20 Take a look at the last sentence of that 21 paragraph: 22 AAA publishers are milking their 23 top franchises, but struggling to refill 24 their portfolio of hit franchises. Most AAA 25 publishers are riding the success of 58 1 P. Spencer - Highly Confidential 2 franchises created ten plus years ago. 3 That's what you wrote to 4 Mr. Nadella, right? 5 A. Yeah. Yes. 6 Q. Going back to our questions before, 7 most -- in your view, most AAA publishers, 8 that is publishers who publish AAA games, are 9 riding the success of franchises created more 10 than ten years ago? 11 A. From a perspective of looking at 12 the portfolio of the publishers that I'm kind 13 of characterizing here, yes, that's true. 14 Q. Further up you say in that same 15 paragraph: 16 Games like Fortnight, Roblox, 17 Minecraft, Candy Crush, Clash Royale, DOTA2, 18 et cetera, were all created by independent 19 studios with full access to distribution. 20 Do you see that? 21 A. I do. 22 Q. What does DOTA2 refer to? 23 A. Defenders of the Ancients 2. It is 24 a game -- a PC game from Valve. It's on 25 Steam actually, sorry. It's actually created 59 1 P. Spencer - Highly Confidential 2 by somebody else. 3 Q. And by contrast to those 4 independent studios, your e-mail here is 5 about AAA publishers riding success of 6 franchises created ten plus years ago, 7 correct? 8 A. Sorry. What was the question? 9 Q. Sure. Reading this paragraph, 10 would you agree that AAA publishers are 11 putting their resources to developing 12 franchises that were first started ten plus 13 years ago and not necessarily developing new 14 franchises? 15 A. No, it kind of goes back to my 16 previous point of these publishers have a 17 broad portfolio of games and they're 18 investing their resources across a broader 19 set of business models and even platforms 20 that may not be characterized by this 21 somewhat hard to define notion of AAA. 22 Q. Are you familiar with 23 conversations -- strike that. 24 Have you had discussions in your 25 role as head of gaming at Microsoft about 60 1 P. Spencer - Highly Confidential 2 owning content versus renting content? 3 A. Yes. 4 Q. Or sometimes instead of owning it, 5 owning and buying on the one hand versus 6 renting on the other hand with respect to 7 content; is that right? 8 A. Is there -- just to make sure I 9 understand, what are the difference between 10 those two statements? 11 Q. Well, those are conversations that 12 you've had as part of your job at gaming, 13 right? 14 A. Yeah, yeah. You just -- I answered 15 the first one and you said what I thought was 16 the same thing again, so I thought there must 17 be some addition that you made in this. 18 Q. The addition I made was owning and 19 buying mean the same thing in this context? 20 A. I -- after you buy something, yeah, 21 then I would consider it owned, yeah. 22 Q. So, what does it mean to buy 23 content versus to rent content in gaming? 24 A. Whether we own the underlying 25 intellectual property for a game is how I 61 1 P. Spencer - Highly Confidential 2 would use that term. 3 Q. And when you buy -- can you expand 4 on that little bit more? Why is -- what is 5 the relationship between owning/buying an 6 intellectual property and content as opposed 7 to renting? 8 A. I'm gonna say the same thing, so I 9 just want to make sure I'm not missing 10 something in the question. 11 When we own the underlying IP, 12 intellectual property, we are the ones that 13 make creative decisions on and business 14 decisions on where that intellectual property 15 shows up. 16 Q. What do you mean by "shows up"? 17 A. Where we choose to use that 18 intellectual property. 19 Q. I'm not trying to be obtuse, but 20 what do you mean where you choose to use the 21 intellectual property; is that about 22 platforms? What are you talking about there? 23 A. Sure. It could be, say we're doing 24 a movie, a television series on an 25 intellectual property. It could be ancillary 62 1 P. Spencer - Highly Confidential 2 products like T-shirts and other things that 3 you might see come out. It could also be, as 4 you say, games based on that intellectual 5 property and what platforms those games ship 6 on. I think about it in totality of we are 7 making the creative decisions on how 8 consumers will see that intellectual property 9 and how it's managed across many different 10 places, marketplaces or, you know, retail 11 places where it might -- I'll use show up 12 again, but... 13 Q. Decisions that you just described, 14 does that include decisions about whether 15 games or gaming content will appear on 16 console only or also appear in a subscription 17 service like Game Pass? 18 A. Those -- those would be in line 19 with the kind of decisions that we'd be 20 making, yes, with intellectual property that 21 we own. 22 Q. And is one of the benefits from 23 Microsoft of owning content as opposed to 24 renting it, that Microsoft gets to decide, 25 you said, where the content can be used? 63 1 P. Spencer - Highly Confidential 2 A. There are multiple benefits, 3 there's a financial benefit in that we're not 4 having to pay a licensee of the content. As 5 we make investments, we understand that the 6 intellectual property will be something we 7 can continue to invest in over multiple 8 years. So, I think there are multiple 9 decisions, kind of, multiple criteria or 10 multiple thing -- benefits of owning the 11 underlying intellectual property that we 12 build games and other products on top of. 13 Q. Okay. Let's disentangle that a 14 little. 15 One of the benefits of owning 16 versus renting content, we're talking about 17 gaming here, is capturing more of the 18 economics when you own versus rent; is that 19 fair? 20 A. It is. 21 Q. And another benefit of owning 22 versus renting content in gaming from your 23 perspective as leader of Microsoft Gaming is 24 it enables Microsoft be the decision-maker 25 about what platforms that content will appear 64 1 P. Spencer - Highly Confidential 2 on, correct? 3 A. That is a benefit, yes. 4 Q. Are there any other primary 5 benefits that come to mind when you think of 6 the benefits of owning versus renting content 7 for gaming? 8 A. The third one I listed is as we're 9 making investments in the intellectual 10 property, we understand that over a longer 11 time horizon we will be able to continue to 12 benefit from that intellectual property being 13 part of our intellectual property portfolio, 14 so it allows us to take a longer time horizon 15 on intellectual property. 16 Q. And what kind of long term benefit 17 of intellectual property are you thinking 18 about when you're taking that longer time 19 horizon? 20 A. It's usually either a person or a 21 financial -- people or a financial investment 22 that we might make in building something new 23 that might take multiple years to actually 24 pay off. And if you own the intellectual 25 property, you have more certainty that as you 65 1 P. Spencer - Highly Confidential 2 get through the investment years in something 3 new, that you will have a longer term ability 4 to see the benefits of that investment and 5 continue to be able to invest in that 6 intellectual property in new ways because 7 there isn't a period by which you have the 8 license for an intellectual property. 9 So, I -- a third benefit that I 10 think often about is our ability to invest in 11 the long-term for these franchises. 12 Q. And this may seem obvious, but by 13 renting in this context, you're talking about 14 licensing; is that right? 15 A. Yes. 16 Q. And in the gaming industry when 17 Microsoft licenses content, those are not 18 licenses in perpetuity, they're term-limited, 19 right? 20 A. Yes. 21 Q. So, when Microsoft owns or buys 22 content, it obviously has the intellectual 23 rights in that content in perpetuity as the 24 owner as opposed to having a term limit on 25 its use of IP when it rents the content, 66 1 P. Spencer - Highly Confidential 2 right? 3 A. There are IP ownership scenarios 4 that we have been in that I would say are 5 more complicated in terms of what rights we 6 have and what period of time we have those 7 rights, but in general, I would say that your 8 characterization is accurate. 9 Q. And what are the factors that you 10 apply when deciding whether to buy or rent 11 gaming content? 12 A. I guess first and foremost is 13 whether something is available to be 14 purchased, whether how an intellectual 15 property relates to the intellectual property 16 that we already own and how an intellectual 17 property would benefit us in the strategic 18 mission that we're on. 19 Q. And the more intellectual property 20 or content will benefit Microsoft in its 21 strategic objective, the more the scale tips 22 towards attempting to own or buy that 23 content? 24 A. I think we'd have to look at all 25 three criteria, obviously the price is a 67 1 P. Spencer - Highly Confidential 2 consideration. 3 Q. Understood. 4 But in that third criteria, to the 5 extent that a property helps advance 6 Microsoft's strategy, that weighs in favor of 7 owning the property? 8 A. If an opportunity comes available 9 for something that could help advantage us in 10 achieving our strategy, yeah, that would 11 weigh in our decision to look at an 12 acquisition. 13 Q. Is it fair to say that since you've 14 become the leader of Microsoft Gaming, 15 Microsoft has accelerated spending to buy 16 content for gaming? 17 A. My view is that when I took this 18 role or was awarded this role, we had to 19 close a number of studios due to the 20 financial profile of the gaming business 21 inside of Microsoft, and when we were able 22 to get to a more firm financial position, I 23 had a -- we had a goal of rebuilding our 24 first-party content capability. 25 Q. And when did your goal of -- when 68 1 P. Spencer - Highly Confidential 2 did you start having a goal of rebuilding 3 Microsoft's first-party content capabilities? 4 A. We had to get to a position with 5 our business where we had both alignment with 6 the company on our strategic direction for 7 gaming as well as a positive P&L in the 8 gaming business profit and loss -- a 9 profitable business that was worth investing 10 in. 11 Q. When did that happen? When did 12 buying more content become a goal toward the 13 business that you could act on? 14 A. I don't think there was a -- 15 necessarily like one before-and-after moment. 16 I felt we were in a better position probably 17 around 2016 with our underwriting business 18 and the position we had inside of the 19 company. 20 Q. And in acting on the goal of 21 acquiring more content, have you been able to 22 acquire more content since 2016? 23 A. Yeah. And we did acquire, like, 24 Minecraft prior to 2016, which was more of an 25 opportunistic acquisition. But, yes, we have 69 1 P. Spencer - Highly Confidential 2 been able to acquire more content. 3 Q. And how have the number of 4 first-party studios at Microsoft grown as 5 part of effectuating this goal of acquiring 6 content? 7 A. The growth in our studio 8 organization has effectively mirrored the 9 growth in the revenue in our business which 10 is basically to double. 11 Q. Since 2016? 12 A. I don't have the firm date in my 13 head. 14 Q. How many first-party studios did 15 Microsoft have when you became leader of 16 gaming? 17 A. I don't remember the exact number, 18 I would have to do some research to answer 19 that. 20 Q. Do you have a ballpark figure in 21 mind? 22 A. Ballpark I might say ten. 23 Q. How many first-party studios does 24 Microsoft have? 25 A. Today depending on exactly how you 70 1 P. Spencer - Highly Confidential 2 count, I'd say somewhere between 20 and 24. 3 Q. And how many studios will -- 4 first-party studios will Microsoft have if it 5 completes the acquisition of Activision? 6 A. Again, it depends. The definition 7 of a studio is not exactly -- 8 THE COURT REPORTER: I'm sorry. 9 Not exactly what? 10 A. Defined, but I think about 11 Activision as having three discrete studios. 12 Q. What are the three discrete 13 studios, just for the record? 14 A. I would say King, Blizzard and the 15 Call of Duty team or studio. 16 Q. In 2020, Microsoft acquired ZeniMax 17 for seven and a half billion dollars, 18 correct? 19 A. Yes. 20 Q. And was that the most ever paid for 21 a game developer at that time -- 22 A. I don't know the answer. 23 Q. -- do you know? 24 A. I don't know the answer to that. 25 Q. Was that more than Disney paid to 71 1 P. Spencer - Highly Confidential 2 acquire the Star Wars franchise? 3 A. I don't know the answer to that. 4 Q. And what's the approximate deal 5 value for Activision? 6 A. $70 billion. 7 Q. To your knowledge, is that the 8 largest acquisition of a game developer? 9 A. To my knowledge it is, yeah. 10 Q. Is that the largest acquisition 11 that Microsoft, as a company, has ever 12 undertaken? 13 A. To my knowledge it is, yes. 14 Q. Have you ever referred to 15 Microsoft's efforts to acquire content that 16 we've been talking about as a surge? 17 A. I don't know. 18 Q. What has been the purpose of 19 acquiring content since 2016, why you doing 20 it? 21 A. We are taking a broad view of the 22 game industry, as you and I have discussed, 23 on the multiple business models and plate 24 things where people play, we talked more 25 about business models. And as we build out 72 1 P. Spencer - Highly Confidential 2 Xbox, I think it's important for us to have 3 creative capability on many different 4 platforms with many different business 5 models. So, we've had to expand our creative 6 and business capability in our studios, and 7 we attempted to do that both through 8 acquisition and through hiring. 9 Q. And did acquiring content have 10 benefits with respect to gaming's Game Pass 11 strategy? 12 A. Yeah, owning -- yes, owning more 13 content adds more content to Game Pass. 14 Q. And does Microsoft's acquisition 15 strategy for gaming have benefits for console 16 as well? 17 A. We have not seen real examples of 18 our console adoption increasing based on the 19 number of studios that we own. 20 Q. So, is it your view -- what's your 21 view in relationship between having 22 first-party content and your goals for the 23 console business? 24 A. What is my view? Our content 25 strategy is -- isn't really tied to our 73 1 P. Spencer - Highly Confidential 2 console. We're looking for content that can 3 help us expand beyond the console. So, it's 4 not often -- I don't -- I can't -- it's not 5 often that I think about the content specific 6 to, say, console share or console vel- -- 7 sale velocity. 8 Q. But I think we talked earlier you 9 do think about content in terms of velocity 10 and growth for Game Pass, correct? 11 A. Adding more content to the 12 subscription is one of the things that we 13 believe will increase the number of 14 subscribers across many -- 15 THE COURT REPORTER: I'm sorry. 16 Across what? 17 A. Across many different devices where 18 people might access Game Pass. 19 Q. What percentage of Game Pass 20 subscribers access Game Pass from Microsoft 21 Xbox console? 22 A. I believe the last number I saw 23 that I have in my memory is roughly 20 of our 24 25 million subscribers are console 25 subscribers today. 74 1 P. Spencer - Highly Confidential 2 Q. Have you used the phrase content -- 3 THE COURT REPORTER: You cut out. 4 Content what? 5 Q. Have you used the phrase "content 6 is king" in your role as head of gaming at 7 Microsoft? 8 A. I don't often use that term. I 9 would imagine at some point in the eight 10 years that I've been in this job, I might 11 have used that term. 12 Q. Is it a term you've heard in the 13 course of your discussions with other members 14 of the GLT? 15 A. Yes, it is a -- it is a phrase in 16 the entertainment industry that I've heard, 17 yeah. 18 Q. Okay. And when that phrase is used 19 at Microsoft, what do you think it means in 20 the gaming CSA in particular? 21 A. Our players have a love of 22 characters and stories and worlds that exist 23 in video games, any content. 24 Q. And why does that make content 25 king? 75 1 P. Spencer - Highly Confidential 2 A. I don't know that it makes content 3 king. There's definitely an understanding 4 that gamers like to play great games. 5 Q. I'm just trying to understand when 6 someone says "content is king," you're saying 7 that's all they mean by that, that gamers 8 like to play great games? 9 A. Yeah, I think so. I mean, I -- 10 yes. 11 Q. I guess I'm trying to understand 12 then, what is your understanding of the 13 phrase "content is king" in relationship to 14 gaming's strategy? 15 A. Kind of my first answer where 16 gamers, consumers have an affinity for the 17 stories and characters in worlds they 18 interact with. That is the thing that our 19 customers have the emotional attachment to. 20 Q. And can you explain more what you 21 mean by affinity and attachment? 22 A. It's the thing that our -- it's the 23 thing that consumers or gamers, part of what 24 they love about playing video games are the 25 stories, characters and worlds that they get 76 1 P. Spencer - Highly Confidential 2 to interact with in the different games that 3 they play. 4 Q. And in your experience as head of 5 gaming and as someone I understand who plays 6 games, do gamers form loyalty for the games 7 for which they have affinity? 8 A. They -- there's a loyalty and a 9 critique and an emotional investment that 10 they make in the different games that they 11 play. 12 Q. I mean, to put it -- to be more -- 13 bluntly, gamers want to play the games that 14 they have grown to like; is that fair? 15 A. I think the phrase I -- the phrase 16 I know I use and that I tried to use earlier 17 was that gamers play great games. I think 18 the difference that I see between the 19 statement you made and I made is I'm not 20 sure -- I might push a little bit on the 21 historical part of that where I think gamers 22 really like to play great games, whether the 23 game is a new game from yesterday or 24 something from their childhood, gamers like 25 to play great games. 77 1 P. Spencer - Highly Confidential 2 Q. And what makes a great game? 3 A. It's in the eye of the player, I 4 wish I had that kind of spreadsheet, but it 5 is really in the eyes of the consumer to make 6 that decision on what's a great game. 7 Q. Is -- at least in the marketplace, 8 is revenue a proxy for determining what games 9 players seem to think are great games? 10 A. Revenue clearly is a gauge of 11 somebody's willingness to invest in a game, 12 and financials are, you know, clearly an 13 important investment for a customer to make. 14 So, the term great, I don't know. But, yes, 15 I will say that the revenue generated by 16 different games really shows its place in the 17 gaming community. 18 Q. Is it fair to say that you were a 19 driver or a leader of the strategy at 20 Microsoft to acquire more content over the 21 last six years or so? 22 A. As the head of gaming, yeah, I 23 would've been -- it rolls up to my decision 24 to add content to the business, yes. 25 Q. Even more than just -- I take it 78 1 P. Spencer - Highly Confidential 2 you weren't just a passive observer as the 3 decision rolled up to you. I'm trying to 4 understand, what was your -- is it fair to 5 say that you're a sponsor of the concept of 6 Microsoft that gaming should acquire more 7 content? 8 A. Yes, I would say in partnership 9 with Matt Booty, who runs our first-party 10 studios organization, we have built a 11 strategy for increasing our first-party 12 portfolio. 13 Q. Again, what is the reason for 14 adopting that strategy, what are the benefits 15 to Microsoft Gaming of adopting a strategy of 16 increasing the first-party portfolio? 17 A. Gaming is going through this 18 transition from devices to players. We 19 realize that our first-party portfolio lacked 20 experience in new business models and new 21 engagement mechanisms. So, we looked to 22 increase our first-party capability so that 23 we have more business and creative diversity 24 in our organization. 25 Q. And were there financial 79 1 P. Spencer - Highly Confidential 2 implications for adopting a strategy of 3 increasing first player -- sorry, first-party 4 content? 5 A. Yes. 6 Q. What are they? 7 A. We're putting capital at risk in 8 acquiring an external company. There's a 9 roadmap of title delivery and financial 10 expectations that are built into the model to 11 get approval for the acquisition. There are 12 strategic imperatives that we've talked about 13 in terms of why we've acquired a studio. And 14 then subsequently we evaluate our acquisition 15 against those metrics. 16 Q. And what are the metrics? 17 A. The metrics really differ per 18 studio that we would acquire. They're 19 specific to the A2N process and strategic 20 approval that we talked about earlier. 21 Q. Part of the metrics against which 22 you're going -- strike that. 23 If you close and complete the 24 acquisition for Activision, what are the 25 metrics you've gotta assign to measure the 80 1 P. Spencer - Highly Confidential 2 $70 billion investment or capital expenditure 3 that Microsoft is making? 4 A. We haven't formalized how we would 5 evaluate the closing, like, the subsequent 6 running of the -- of Activision Blizzard 7 King. From a strategic perspective, the most 8 important aspect of us acquiring Activision 9 King is us becoming relevant with gamers who 10 play on mobile devices. So, I would expect 11 our mobile opportunity to be a highlight of 12 how we think about our success post this 13 acquisition. 14 Q. And you're referring to the King 15 studio there? 16 A. It's not just King. But, yes, King 17 has Candy Crush, there is a Call of Duty 18 mobile game, there is a Diablo mobile game 19 that are -- those are currently in market. 20 And those were really the critical aspects of 21 why we thought Activision Blizzard King was 22 an important acquisition consideration for 23 us. 24 Q. I see. 25 So, is it your testimony that 81 1 P. Spencer - Highly Confidential 2 gaining further entrance into mobile gaming 3 was the reason for the Activision 4 acquisition? 5 A. Absolutely. Yes. 6 Q. Any other reasons? 7 A. If you look at the valuation of, as 8 you've mentioned, it's $70 billion which is a 9 sizable capital expenditure for the company, 10 so there are metrics that we have to -- there 11 are -- there's a running of the business, the 12 existing business that has to be done 13 successfully in order to justify the 14 acquisition cost. From a strategic 15 imperative, the largest platform for gamers 16 on the planet are mobile phones of which 17 Apple and Google have complete control over 18 distribution and discovery and monetization. 19 And in order for us to be successful as a 20 gaming company, we are gonna have to be 21 successful on mobile devices and looking 22 at -- this was the best portfolio of mobile 23 franchises and capability that we saw 24 available in the market. 25 Q. Who are the biggest game publishers 82 1 P. Spencer - Highly Confidential 2 in your mind, by revenues? 3 A. Tencent would be the largest, 4 NetEase I believe is number two, it's not 5 always easy to get accurate financials from 6 some of the Chinese publishers, but they're 7 very large. I don't know that I -- I don't 8 have in my head the breakdown between -- on 9 Sony's business between their hardware 10 business and their own publishing business. 11 Activision would be one of the largest by 12 revenue game publishers, Electronic Arts 13 would be a large publisher, Nintendo would be 14 a large publisher of games. 15 Q. And does your list change if we 16 just talk about the United States? 17 A. I never look at the gaming business 18 by just the United States. I think if you 19 look at -- meaning like the publishers 'cause 20 games are global, outside of China games are 21 global. If you think I would still start 22 with Tencent given their majority ownership 23 in Epic that builds Fortnight, their 24 ownership of League of Legends, which is one 25 of the biggest -- Riot Games, it's one of the 83 1 P. Spencer - Highly Confidential 2 biggest publishers of games, they're based in 3 California even though they're owned by 4 Tencent. There are other large game 5 publishers that are outside of China owned by 6 Tencent. So, I would -- I don't -- I would 7 still believe Tencent is number one. 8 Q. And when Microsoft doesn't own 9 content and has to -- 10 THE COURT REPORTER: I'm sorry. 11 You cut out again. 12 Q. When Microsoft doesn't own content 13 and determines instead to rent it, that means 14 negotiating a license for the content, 15 correct? 16 A. Yeah, in almost every instance it 17 does, yes. 18 Q. Okay. And is that Ms. Bond's 19 responsibility at Microsoft to negotiate 20 licenses with game developers and publishers? 21 A. It is Lori Wright's responsibility, 22 who is one of the direct reports of Sarah 23 Bond. 24 Q. And what is your role in 25 negotiation of renting content for use in 84 1 P. Spencer - Highly Confidential 2 Microsoft Gaming? 3 A. We don't do very much renting of 4 content, so it's not an instance that comes 5 up very often. In the general approval of 6 our contracts I final -- I am final approval 7 on any contract above a certain threshold. 8 Q. Well, for example, Microsoft has to 9 rent content from EA, right? 10 A. Sorry. We're using the term 11 differently there. We -- we don't -- well, 12 can you -- what do you mean by renting 13 content from EA? 14 Q. Well, to use EA content or offer EA 15 content to Microsoft Gaming users on console 16 game cloud -- sorry, Game Pass or xCloud, 17 does Microsoft need a license from EA? 18 A. We need an agreement with EA. I 19 want to backtrack just a bit. 20 When you are asking me about 21 renting IP, which is what we were talking 22 about previously, my -- I was -- because of 23 the specific of how you asked it, I was 24 answering if we were to build our own 25 first-party game, games, based on 85 1 P. Spencer - Highly Confidential 2 intellectual property that we would -- that 3 we don't own, that we would have to rent the 4 IP. We have a general publishing licensing 5 agreement that we have with third-party 6 publishers on Xbox that I don't characterize 7 as us renting games. That is the agreement 8 that publishers have with us with standard 9 terms to ship what the financials included, 10 to ship games on our platform and if there 11 are specifics that we are gonna do on a 12 partnership that might be more detailed, 13 there might be addendums to our PLA with 14 certain partners to include things like 15 promotion or Game Pass or other 16 considerations. 17 Q. Okay. So, when you have -- when 18 Microsoft Gaming makes agreements with 19 third-party publishers or developers, you 20 don't consider that to be renting content for 21 use on Microsoft's devices? 22 A. I just want to make sure -- I want 23 to be accurate in how I answer. 24 If a developer decides they want to 25 ship a game on our Xbox console, I do not 86 1 P. Spencer - Highly Confidential 2 consider that us renting content. That is 3 making our platform available. As I said, 4 our terms are fairly standard for any 5 developer or any individual actually who 6 wants to go and build a game and ship it to 7 Xbox. There are certain rules around content 8 must be rated so that we can protect our 9 customers from bad content and other kind of 10 malicious behavior. 11 I don't consider that us renting, 12 that is just us allowing publishers or 13 developers or individuals to ship games on 14 Xbox. 15 As I said, I apologize if I 16 misunderstood how the question was asked. 17 When you asked about renting, I was thinking 18 more in the context of this document that I 19 still have up listing fran- -- listing like 20 Star Wars. If we were to go do a Star Wars 21 game, we would have to go and rent the Star 22 Wars IP for us to go build. And then 23 Activision or an EA is shipping games on our 24 platform like FIFA or Madden or Call of Duty, 25 I don't consider that us rent- -- that we're 87 1 P. Spencer - Highly Confidential 2 not renting their games, they're shipping 3 their games on our platform. 4 Q. You mentioned standard terms of 5 these agreements, the licenses. 6 Is there a -- there's a standard 7 economic split in the industry for platforms 8 like Microsoft when they work with 9 developers, correct? 10 A. There's a standard financials that 11 we have for shipping games on Xbox, yeah. 12 Q. What is that? 13 A. It captures multiple business 14 models. If you're shipping disc versions of 15 your games, there's a disc royalty, I 16 apologize, I don't have the exact number in 17 my head for how much a disc royalty -- what 18 the disc pressing royalty is. In the digital 19 store, the standard terms are 70 percent of 20 the revenue goes to the content creator and 21 30 percent stays with the platform, say that 22 would be for base sales and post-sale 23 monetization. 24 Q. So, 70/30 is the standard economic 25 split for Microsoft, 30 to Microsoft when it 88 1 P. Spencer - Highly Confidential 2 negotiates with game developers for games to 3 go on console or Game Pass or cloud; is that 4 right? 5 A. Our revenue split is different on 6 PC. So, for third parties that put games in 7 our Windows store, the split for most of 8 those partners is 88 percent goes to the 9 partner, 12 percent stays with Microsoft, 10 from memory that's the current revenue split 11 on Windows, so it is different in different 12 instances. On console, the standard split 13 would be 70/30, different on Windows. And on 14 our cloud, we have different negotiations 15 with different partners, depending on their 16 size. 17 Q. Is 70/30 the standard split for 18 gaming in Game Pass? 19 A. No. Because Game Pass is a model 20 where in most instances when a game is being 21 published or when it's being shipped into the 22 subscription, in most instances we will have 23 paid an upfront licensing cost to the 24 developer -- to the publisher to put the game 25 into Game Pass. And certain partners will 89 1 P. Spencer - Highly Confidential 2 have a performance part of their -- part of 3 their discussion, part of our deal for how 4 much they get paid for how much their game 5 gets used in Game Pass. 6 Q. So, when a game is played in Game 7 Pass and there's a post-sale monetization in 8 whatever form, is that subject to the usual 9 70/30 slate unless otherwise negotiated -- 10 A. Yes. 11 Q. -- or varies? 12 A. Yes, the post-sale monetization for 13 games that are in Game Pass is 70/30 split. 14 Q. And that's the typical split for 15 Game Pass games? 16 A. For Xbox games in general 17 regardless of the business models that were 18 used to acquire the license. 19 Q. Okay. Why is PC 88/12? 20 A. We are trying to grow our Windows 21 store. We have large base of Windows 22 consumers. And as we try to make the Windows 23 store more popular for app and game 24 developers, one way to do that is to change 25 the economics specific to gaming that 90 1 P. Spencer - Highly Confidential 2 dominate gaming store on the market on PC is 3 Valve Steam. So, in order to compete with 4 that, there was a desire or a need, I would 5 say, to change the economics for developers 6 to get them to also adopt the Windows slate. 7 Q. So, in that instance on PC, 8 Microsoft has to offer more economics to the 9 developer to attract more content to the PC 10 platform; is that fair? 11 A. It would be part of the equation 12 that a developer would use to choose whether 13 they would support the Windows store or not. 14 I wouldn't say it's the only criteria. I 15 think in general when a marketplace is behind 16 significantly, it has to not only offer 17 economic incentives, but likely also ease of 18 development and other things that would make 19 the app or game developer's job easier. 20 Q. In a related vein but slightly 21 separate, would you agree that the supply of 22 games that are affected to be attractive to 23 gaming's users is structurally limited? 24 A. Can you just tell me the definition 25 of how you would say -- what you mean by 91 1 P. Spencer - Highly Confidential 2 "structurally"? 3 Q. Yes. Let's look at a document. 4 MR. WEINGARTEN: Let's see if we 5 can get PX1065 into the platform. If 6 we can, we'll introduce PX1065. 7 A. There it is. 8 (Exhibit PX1065, E-mail chain with 9 attachment, Bates MSFT-2R-05727022, 10 was introduced.) 11 BY MR. WEINGARTEN: 12 Q. Good. Please open that document. 13 It's rather long, but I'll ask you a little 14 bit about the e-mail that's on top, and this 15 question in particular is about page 017, 16 PX1065-017. Let me know when you feel 17 comfortable. 18 A. Okay. I will read down to there. 19 (Document review.) 20 MR. WEINGARTEN: You know, we 21 might be due for another break. I'm 22 content to go off the record, give the 23 witness some minutes since we're kind 24 of entering a little bit of new phase 25 here, if that's all right with you, 92 1 P. Spencer - Highly Confidential 2 Beth. 3 MS. WINKINSON: Sure. 4 MR. WEINGARTEN: So, we'll go off 5 the record, please. 6 THE COURT REPORTER: We're off the 7 record. 8 (Whereupon, a brief recess was 9 taken.) 10 THE COURT REPORTER: We're back on 11 the record. 12 BY MR. WEINGARTEN: 13 Q. Mr. Spencer, PX1065 is in the chat, 14 in the Box so you can review the document. 15 Before we took our break, we were 16 talking about what structurally limited 17 means, and we were talking about the 18 availability of attractive games for 19 Microsoft's gaming business. And I believe 20 you had asked me what do I mean by it and I 21 put this document -- we're introducing 22 PX1065. I think we'll get to what that 23 language means in Microsoft Gaming. Let me 24 just ask you a few questions about the 25 document. 93 1 P. Spencer - Highly Confidential 2 On page 1, the top e-mail in the 3 chain is from David Hampton to gaming 4 business planning and strategy. 5 Do you see that? 6 A. I do, yes. 7 Q. And it's dated November 10, 2020. 8 Do you see that? 9 A. Yes. 10 Q. And Mr. Hampton writes to this 11 list, sir: 12 Game on. 13 Are you on the gaming business 14 planning and strategy e-mail distribution 15 list? 16 A. I don't know that. I don't know 17 the answer to that. 18 Q. Well, in any event, the e-mail that 19 he forwards is from you also on November 10, 20 2020, correct? 21 A. Yes. 22 Q. And it's from you and Ms. Hood to 23 Mr. Nadella, right? 24 A. Yes. 25 Q. And the subject is Request for 94 1 P. Spencer - Highly Confidential 2 Strategy Approval: Sega, correct? 3 A. Yes. 4 Q. And you write to Ms. Hood and 5 Mr. Nadella: 6 I'm writing to request strategy 7 approval to approach Sega Sammy, S-A-M-M-Y, 8 regarding a potential acquisition of their 9 Sega gaming studios. 10 Do you see that? 11 A. I do. 12 Q. And is the purpose of this document 13 to lay out the reasons why Ms. Hood and 14 Mr. Nadella to give approval for you to begin 15 the process of acquiring content from Sega 16 Sammy? 17 A. More specifically I would say it's 18 to begin the process of discussions with Sega 19 Sammy about both the acquisition as well as 20 to help frame up the financials for the next 21 step, which would be the approval to 22 negotiate. 23 Q. And you give a little overview of 24 Sega. And then continuing on page 2, you 25 describe some value drivers, right? 95 1 P. Spencer - Highly Confidential 2 A. Yes, there's value drivers in the 3 middle. 4 Q. Okay. And there are -- fair to say 5 that the value that you're referencing being 6 driven is strategic value and there's also 7 economic value, right? 8 A. Yeah, the sentence says it's 9 strategic value and economic value, yeah. 10 Q. Obviously those two things are 11 related. But am I correct that one should 12 evaluate both economic value and any 13 independent strategic value when you're 14 thinking about gaming deals? 15 A. Yeah. So, if you scroll up, when 16 we talk about the strategy framing in the 17 context of growing PC, mobile, you see that 18 up above? 19 Q. Yes, sir. 20 A. And then here when we talk about 21 the value, we're really starting the 22 discussion about what we think the 23 justification for the value of Sega from an 24 economic standpoint would look like, meaning 25 what would the near-term financial return 96 1 P. Spencer - Highly Confidential 2 have to be in order to justify a given 3 valuation for Sega, which in a given time 4 frame might not correlate to the strategic 5 value of why you might acquire Sega, which is 6 why we have those two separate views, the 7 strategy approval and the approval to 8 negotiate. 9 Q. Got it. 10 While you hope -- let's put it this 11 way: Is it fair to say that while you would 12 want strategic and economic value to align, 13 it may be the case that an asset has 14 significant strategic value that it may 15 outweigh the economic value? 16 A. I think how I would -- yes, but I 17 would also say we evaluate the financials of 18 a term over a fixed time frame where some of 19 the strategic value may not pay out, and 20 obviously from a shareholder, like, a Sega 21 shareholder perspective, when they think 22 about the value they deserve for selling Sega 23 game studios, they're obviously thinking 24 about more of the economic consideration than 25 our strategic consideration, which is why we 97 1 P. Spencer - Highly Confidential 2 try to separate those discussions. 3 Q. Got it. 4 If you turn to page 003 of the 5 document, please, it has a big number 1 at 6 the top and says Strategy Overview. And 7 based on the cover e-mail, it looks like this 8 document is called gaming CSA-Strategic 9 Framing Memo-Sega v, as in Victor, F, as in 10 Frank. 11 Do you see that? 12 A. I see where it says Strategy 13 Overview, I don't necessarily -- I don't see 14 the file name you're referencing. But I see 15 on page 3 where there is a heading 1, 16 Strategy Overview. 17 Q. I'm sorry. Let me take you back to 18 page 001. Just look at Mr. Hampton's e-mail 19 where it says attachment in the header. 20 A. Sorry. Okay. Yes. 21 Q. Does that indicate to you that 22 that's the name of the document? 23 A. Assuming this is the document that 24 was printing -- that was printed from David's 25 mail, then, yeah, this says there's an 98 1 P. Spencer - Highly Confidential 2 attachment called the Strategy Framing 3 Memo-Sega vF that's -- 4 Q. Okay? 5 A. -- attached to this mail, yeah. 6 Q. Are you familiar with documents 7 strategy framing memos that are drafted as 8 part of seeking strategy approval for a 9 potential acquisition? 10 A. I'm familiar with the practice of 11 us establish -- attaching a, kind of, most 12 recent updated strategy memo with requests 13 for acquisition or strategy approval. 14 Q. And on page 1 again -- I'm sorry to 15 jump around with you -- on page 1 of PX1065, 16 if you look at your first paragraph, the last 17 sentence says: 18 Please find the attached memo and 19 bullets below for additional detail on our 20 strategy to prioritize our next acquisition 21 target. 22 And then the sentence goes on. 23 Do you see that? 24 A. Yeah. 25 Q. Okay. Do you remember sending this 99 1 P. Spencer - Highly Confidential 2 document or this e-mail to Ms. Hood and 3 Mr. Nadella? 4 A. I don't remember sending this 5 specifically, but I remember the time when we 6 were looking at Sega. 7 Q. And was it the typical practice in 8 gaming to create a document like this as part 9 of seeking strategy approval for an 10 acquisition? 11 A. Yeah, if our team got to the point 12 where we felt like there was strategic 13 alignment, we would send a document like this 14 to Amy and Satya for deals that we expected 15 to exceed my signing authority for the deal. 16 Q. And what was your role -- I mean, 17 let me put it this way: You sent the 18 document to Ms. Hood and Mr. Nadella. 19 Did you write the document? 20 A. The document would've been crafted 21 by David Hampton in conjunction with Tim 22 Stuart and Sarah Bond. 23 Q. And would you have reviewed it 24 before you sent it to Ms. Hood and 25 Mr. Nadella? 100 1 P. Spencer - Highly Confidential 2 A. I would. 3 Q. I assume that you try to be 4 accurate in the information you convey to 5 Ms. Hood and Mr. Nadella, correct? 6 A. We do try to be accurate, yes. 7 Q. Okay. So, let's take a look, sir, 8 if you could, at page PX1065-017. It's 9 page 15 of the memo. Let me know when you're 10 there. 11 A. You said 17, 1-7. 12 Q. Yes, sir. 13 A. Yeah, I'm there. 14 Q. Okay. And you'll see there's a 15 heading, 9.2 Xbox Game Pass State of the 16 Union. 17 Do you see that? 18 A. I do. 19 Q. Says: 20 Xbox Game Pass is a leading content 21 subscription service in gaming with nearly 22 15 million subscribers. 23 Do you see that? 24 A. I do. 25 Q. Okay. The next sentence talks 101 1 P. Spencer - Highly Confidential 2 about the size of the overall opportunity, 3 then it says: 4 Achieving our subscriber ambitions 5 is predicated on our ability to create value 6 for our members and partners. 7 Do you see that? 8 A. I do. 9 Q. Beginning with "continued 10 investment in content," does members there 11 mean subscribers? 12 A. It does. 13 Q. And partners mean developers of 14 games? 15 A. Just so I'm clear on this one 16 because of our rented conversation 17 previously, partners would be non-Xbox 18 studios that are doing deals with us to put 19 games into the Game Pass subscription. 20 Q. And so, the beginning, according to 21 this sentence, right: 22 Achieving of subscribers ambition 23 is predicated on creating value and members 24 and partners and creating value begins with 25 Microsoft continuing investment in content. 102 1 P. Spencer - Highly Confidential 2 Correct? 3 A. Yes. 4 Q. Okay. The memo continues: 5 To that end, Xbox Game Pass faces 6 three primary content dynamics. 7 Let's look at number 1, okay? 8 Need for differentiated content. 9 Do you see that? 10 A. I do. 11 Q. And here it talks about for gaming, 12 differentiated content means investing in 13 content that is, and it lists three features 14 that define differentiated content, right? 15 A. Three different criteria by which 16 we could evaluate content, yes. 17 Q. Well, it says, differentiated 18 content means investing in content that is, 19 and it lists three things, one, two and 20 three, right? 21 A. Yes. 22 Q. So, Xbox and Microsoft Gaming are 23 going to -- well, strike that. 24 Do you agree with what you wrote to 25 Ms. Hood and Mr. Nadella that there is -- 103 1 P. Spencer - Highly Confidential 2 that Xbox and Microsoft Gaming have a need 3 for differentiated content? 4 A. We do have a need for 5 differentiated content, yes. 6 Q. And you wrote to Ms. Hood and 7 Mr. Nadella that differentiated content means 8 investing in content that is 1) exclusive to 9 the service, differentiate relative to other 10 services, right? 11 A. That's the first criteria that's 12 listed here, yes. 13 Q. And the service there is what? 14 A. The service here in this context is 15 Game Pass. 16 Q. Number 2, differentiated content 17 means investing in content that is 18 blockbuster in scale, to attract and engage 19 users. 20 Do you see that? 21 A. I do see that. 22 Q. What does blockbuster in scale 23 mean? 24 A. We often think about games in the 25 size of their player base, the number of 104 1 P. Spencer - Highly Confidential 2 people who play a game, so their engagement 3 all up. And blockbuster is a term for a game 4 that has a lot of players. 5 Q. Does scale also refer to revenue 6 that a game generates? 7 A. Not in the context that we're using 8 it here. 9 Q. Okay. So, in this context, 10 blockbuster in scale means a game or content 11 with a large number of users and -- large 12 number of users who are engaged with the 13 game; is that fair? 14 A. Yeah, a large number of players, 15 yeah. 16 Q. Okay. Number 3, released on a day 17 and date basis, (i.e., releases in the 18 service on the day it launches), to maximize 19 the value of the content to subscribers. 20 Does that refer to making a game 21 available in Game Pass on the same day that 22 it becomes available for purchase for use on 23 the console? 24 A. I would just strike the on console, 25 I think it -- because we have PC games in 105 1 P. Spencer - Highly Confidential 2 Game Pass, so... But, yes, it would be the 3 game is in the subscription on the same day 4 it's available for purchase. 5 Q. Number 2 is Expanding Beyond 6 Console. And there it says: 7 Console is a proven subscriber 8 onramp for Xbox Game Pass. 9 You see that? 10 A. I do. 11 Q. Do you agree with that statement 12 that you wrote to Ms. Hood and Mr. Nadella? 13 A. Yes. 14 Q. Okay. And you write: 15 But the total opportunity is 16 limited by the active installed base of Xbox 17 consoles, PC and cloud dramatically expand 18 our market opportunity, addressing that 19 opportunity requires differentiated content 20 that is attractive to players in those 21 segments. 22 So, there, again, differentiated 23 content appears in number 2, correct? 24 A. Differentiated content does appear 25 in number 2, yes. 106 1 P. Spencer - Highly Confidential 2 Q. Okay. Now, what started this whole 3 train of thought, number 3: 4 Limited Content Supply. 5 So, you wrote to Ms. Hood and 6 Mr. Nadella that different than other 7 entertainment markets, the supply of 8 attractive games is structurally limited. 9 And then you define for them what 10 structurally limited in the context of gaming 11 means, correct? 12 A. Yes. 13 Q. Okay. And you wrote that 14 structurally limited means, quote: 15 Long development cycles, 16 progressive industry consolidation and high 17 average engagement per title translate into a 18 reduced content supply in gaming relative to 19 music or video. This complicates our ability 20 to rent differentiated content across 21 console, PC and cloud. 22 Those factors that you listed, sir, 23 in that sentence that starts with "long 24 development cycles," is that an accurate list 25 of the factors that contribute to the limited 107 1 P. Spencer - Highly Confidential 2 content supply in gaming? 3 A. Long development cycles, 4 progressive industry consolidation and high 5 average engagement per title. That is what 6 the document says. I, sitting here today 7 actually, don't agree with the statement, but 8 it is what the document says. 9 Q. What don't you agree with about the 10 statement today? 11 A. I think in reality in our industry 12 today, when you look at the most successful 13 games that have the highest number of 14 players, they are not constrained by long 15 development cycles, consolidation or 16 engagement per title when you just look at 17 the success of the games that are in the top 18 either revenue generating or hour generating 19 games. But I'm not -- I'm not disputing that 20 it's in the document and I sent this document 21 to Amy and Satya. But I'm just saying, 22 looking at the number of video games created 23 right now is incredibly high and success 24 comes from many different places. 25 Q. Well, do you agree still that those 108 1 P. Spencer - Highly Confidential 2 features complicate Microsoft's ability to 3 rent differentiated content across console, 4 PC and cloud? 5 A. Yes, I would say long development 6 cycles. I don't really think the industry 7 consolidation has much impact in our ability 8 to license content for Game Pass, but I would 9 say long development cycles and high 10 engagement, specifically in free-to-play 11 titles, do limit our ability to find games to 12 put into Game Pass. 13 Q. And here, sir, the use of the word 14 "rent," I know we talked about that before. 15 Here the use of the word "rent," am I right 16 that the word "rent" here doesn't mean 17 license IP like Star Wars so that Microsoft's 18 first-party studios can develop a Star Wars 19 game? 20 A. Yeah, the use of the word "rent" 21 here would amount to how you were using the 22 term previously of third-party games that are 23 in the market where we would strike a deal 24 with the publishing partner to put that game 25 into Game Pass. 109 1 P. Spencer - Highly Confidential 2 Q. Okay. So, in this context then 3 when we're talking about Game Pass and 4 content for gaming, rent here means 5 third-party content that Microsoft had to pay 6 economics on as opposed to first-party 7 content that it owns; is that right? 8 A. Yes. 9 Q. Okay. Let me ask you a bit about 10 Call of Duty. 11 Do you remember, sir, in January of 12 2020, you started a series of meetings with 13 Activision to ensure rights for the 14 Activision content on what was then called 15 Project Scarlett and the Game Pass and 16 xCloud? 17 A. Yes, I remember the beginning of 18 our -- what I would call our PLA discussions, 19 our publishing licensing agreement 20 discussions with Activision for our upcoming 21 console launch, code name Scarlett, yeah. 22 Q. And Scarlett is what became Xbox 23 Series X and S, correct? 24 A. Yes. Yeah, we think about -- we 25 were defining Scarlett to also include the 110 1 P. Spencer - Highly Confidential 2 idea of players playing on PC or playing via 3 cloud, but the devices that ship to consumers 4 out of Project Scarlett would've been 5 Series S and Series X like you said. 6 Q. And you were the lead on 7 negotiating with Activision with respect to 8 the economics for getting Call of Duty on 9 Scarlett, Game Pass and xCloud; is that 10 correct? 11 A. I'm ultimately responsible for the 12 deal that we agree to. I would've called 13 Sarah Bond the lead negotiator on the deal. 14 Q. Did you take a more active 15 involvement in these negotiations with 16 Activision than you did as opposed to 17 negotiations with other developers that 18 Ms. Bond was leading? 19 A. For the larger publishers on our 20 platform, my initial engagement is usually 21 the same where I will be part of a site 22 visit. In the case of the negotiation with 23 Activision, it was a longer negotiation with 24 them from their push, so it dictated that the 25 conversation took longer. 111 1 P. Spencer - Highly Confidential 2 Q. Okay. And were you the ultimate 3 decision-maker with respect to a deal to 4 secure Call of Duty rights for Scarlett, Game 5 Pass and xCloud? 6 A. It would've depended in the end on 7 the financials in the deal and if it exceeded 8 my limit of -- my approval limit within the 9 company at the time. So, I would've either 10 been the final approval-er or the one who 11 would have forwarded and sent a mail on to 12 Amy and Satya for -- specifically Amy, for 13 approval on the deal if it exceeded my 14 authority. 15 Q. Within gaming you were the highest 16 decision-maker with respect to -- 17 A. Yep. 18 Q. -- whether to approve a deal? 19 A. Yes. 20 Q. Is it fair to say that your 21 objective was to secure rights for Call of 22 Duty on Xbox and in Game Pass? 23 A. As part of our PLA discussions, our 24 desire would've been to ensure that all 25 Activision Blizzard games would've shipped on 112 1 P. Spencer - Highly Confidential 2 Xbox. 3 Q. Including Call of Duty? 4 A. Including Call of Duty, but not 5 solely Call of Duty. 6 Q. And as part of your discussion, it 7 would've been your objective to fold in Game 8 Pass into your negotiation, correct? 9 A. If we can secure Game Pass rights 10 at the time of negotiating a PLA, it is more 11 efficient for us, yes. 12 Q. Okay. 13 MR. WEINGARTEN: Let's put -- 14 let's introduce PX1245, please. 15 (Exhibit PX1245, E-mail chain with 16 attachment, Bates MSFT-2R-03620309, 17 was introduced.) 18 BY MR. WEINGARTEN: 19 Q. Let me know when you've had a 20 chance to receive it and open it please, sir. 21 A. I have opened it. 22 Q. This one is shorter than the other 23 ones we have looked at, let me know when you 24 have familiarized yourself with the document. 25 A. I will do that. 113 1 P. Spencer - Highly Confidential 2 (Document review.) 3 Okay. I've finished reading it. 4 Q. Okay. This is an e-mail chain 5 between you, Ms. Hood, Mr. Nadella, Ms. Bond 6 and some others, correct? 7 A. Yes. 8 Q. Okay. The e-mail that starts -- 9 well, strike that. 10 At the bottom of page 001, there's 11 an e-mail from you to Mr. Nadella and 12 Ms. Hood and Ms. Peggy Johnson. 13 Do you see that? 14 A. I do. 15 Q. And it's dated January 27, 2020. 16 You see that? 17 A. I do. 18 Q. Who is Ms. Johnson? 19 A. Peggy Johnson was the head of 20 business development at the company, and I 21 don't remember if specifically at this time 22 this was true, but initially she was Sarah 23 Bond's manager. Sarah Bond eventually moved 24 to report to me and I just don't remember on 25 the timing whether she reports to -- Sarah 114 1 P. Spencer - Highly Confidential 2 reports to Peggy or Sarah reports to me at 3 the time of this mail, I don't remember. 4 Q. And when you say Ms. Johnson was in 5 charge of business development for the 6 company, you mean for all of Microsoft? 7 A. For all of Microsoft, she was a 8 senior leadership team member, so my peer. 9 Q. Okay. If you look at the fourth 10 paragraph down in your e-mail to the CEO, the 11 CFO and the head of business development for 12 Microsoft, you say: 13 Sarah and I are traveling to ATVI 14 next week to secure rights for ATVI on 15 Scarlett, Xbox Game Pass and xCloud. 16 See that? 17 A. Yeah. 18 Q. ATVI stands for Activision? 19 A. That's their stock ticker symbol, 20 yes. 21 Q. Okay. So, you and Ms. Bond were 22 traveling with the goal of getting rights to 23 Activision content on Scarlett, Game Pass and 24 xCloud, right? 25 A. That's right. 115 1 P. Spencer - Highly Confidential 2 Q. And then in the next sentence you 3 tell your -- you tell the senior leaders at 4 Microsoft that you're gonna secure those 5 rights through, quote, 80/20 value exchange 6 in our console store, 95/5 in our PC store 7 and co-marketing for key titles over the next 8 four years. 9 Do you see that? 10 A. Yeah. Yes. 11 Q. 80/20 is a divergence from the 12 standard we were talking about earlier of 13 70/30 split, correct? 14 A. Yes, it is. 15 Q. Okay. And 95/5 is even more of a 16 divergence than the 88/12 split we talked 17 about earlier, correct, for the PC store? 18 A. Yes, it is. 19 Q. And you were gonna offer Activision 20 co-marketing for key titles for four years, 21 right? 22 A. I would -- the co-marketing for 23 their key titles is something that partners 24 pay for, so that would've been what we 25 acquired in return for the financial 116 1 P. Spencer - Highly Confidential 2 considerations prior. So, that is valued 3 back to us. 4 Q. Oh, I see, because the way the 5 sentence reads, it says you're going to 6 secure rights. And then it says, you'll 7 secure the rights through 80/20 value 8 exchange in console, 95/5 in PC and 9 co-marketing. 10 A. Yeah. 11 Q. So, I read that as Microsoft 12 offering something to secure rights? 13 A. Yeah, the co-marketing for key 14 titles you might've seen, like when a 15 television ad runs, there might be branding 16 around that television ad for key third-party 17 titles. And in this case, the branding 18 around advertising for these key titles would 19 be Xbox. So, I understand why reading it 20 without knowing it might feel like that was a 21 give on our part, but those are -- 22 co-marketing deals are fairly prevalent in 23 the gaming industry, and the co-marketing 24 partner is the one who pays. So, in this 25 instance, we see it as value back to us to 117 1 P. Spencer - Highly Confidential 2 highlight our brand. 3 Q. Is Call of Duty one of the key 4 titles you reference in that sentence? 5 A. No. Sony owns the co-marketing for 6 Call of Duty and they did at this time. 7 Q. What key titles are you referring 8 to in that sentence? 9 A. I don't know the specific four, I 10 just know that Call of Duty is owned by the 11 co-marketing is owned by Sony -- 12 THE COURT REPORTER: I'm sorry. 13 Mr. Spencer, you froze. 14 A. I don't remember explicitly what 15 the four titles are. I know that Sony owns 16 the co-marketing relationship with Call of 17 Duty and did at this time. The two titles we 18 ended up with co-marketing deals for were 19 Diablo 4 and Overwatch 2. 20 Q. And when you reference "four 21 titles," do you mean that there are -- you 22 consider there to be four key titles at 23 Activision? 24 A. Yes. 25 Q. And I'm sorry, what are the four 118 1 P. Spencer - Highly Confidential 2 titles that are key at Activision? 3 A. Well, I'm saying, I don't remember 4 exactly what four titles. Oh, it's over the 5 next four years, sorry, I was confused. For 6 key titles over the next four years, I was 7 confused on the number four. 8 I will say the titles that we ended 9 up with were Diablo 4 and Overwatch 2. I 10 read the four -- I transposed the four to be 11 four number of titles as opposed to for 12 titles -- or titles for the next four years, 13 I apologize for my mistake. 14 Q. On the 95/5 in PC store, we talked 15 earlier about the rationale for sometimes 16 offering 88/12 economic split in PC store. 17 Do you remember that? 18 A. I do. 19 Q. And is the offer 95/5 the same 20 rationale? 21 A. As it relates to Activision 22 specifically, Sony has offered Activision 23 better economics in the PlayStation store. 24 And the PlayStation store is roughly twice 25 the size from a revenue standpoint as the 119 1 P. Spencer - Highly Confidential 2 Xbox store. So, in order for us to compete 3 financially against our competitor, I have to 4 find revenue sources outside of just my 5 console to help give a counter deal to the 6 deal that my competitor would be putting on 7 the table. And this 95/5 in PC, we'd lose 8 money at that revenue split, but our hope was 9 that it might entice Activision to not skip 10 our platform with their titles. 11 Q. I'm sorry. Did you say not to 12 "skip our platform"? 13 A. Yeah. At this time, Sony was 14 actively paying third-party publishers not to 15 ship on Xbox. They would ship on PlayStation 16 and PC and take a financial consideration 17 from Sony to skip Xbox console. So, my 18 desire -- and there were a number of those 19 deals that had come through that we had seen 20 where games -- third-party games were 21 announced that were excluding Xbox when they 22 launched. So, this is Sarah and I attempting 23 to come up with a value exchange to 24 Activision that would counter Sony trying to 25 continue to pay Activision to either skip 120 1 P. Spencer - Highly Confidential 2 shipping on Xbox or in the case of Call of 3 Duty to make the experience on Xbox 4 significantly devalue relative to the 5 experience on PlayStation. 6 Q. And is it your experience 7 competition with Sony that Sony would pay 8 developers to degrade the experience of their 9 game on Xbox? 10 A. Yeah, absolutely. They market 11 PlayStation as the best place to play, and 12 part of that value proposition is that the 13 experience on Xbox is not -- is not 14 equivalent. And there are a number of games 15 that have launched over the last three years 16 where they've paid for content to skip Xbox, 17 or complete games to skip Xbox. 18 (Cross-talk.) 19 Q. Sorry, go ahead. 20 A. I was gonna say, just because it's 21 sharp in my memory, ZeniMax, as we talked 22 about earlier, the first two games that we 23 shipped after the close of the ZeniMax 24 acquisition were games that Sony paid ZeniMax 25 prior to our acquisition to ship and skip 121 1 P. Spencer - Highly Confidential 2 Xbox. So, I have some firsthand knowledge of 3 these experiences where third-party 4 developers were paid to the ultimate less 5 experience on Xbox being nonexistent and 6 they've used their market position to pay 7 developers to, as I said, either deprecate or 8 skip our platform all together. 9 Q. And so, has Microsoft Gaming ever 10 deprecated a game that was gonna be offered 11 on another platform? 12 A. Prior to me in this position, we 13 had -- Xbox had a 30-day window on Call of 14 Duty maps where they would be available first 15 on Xbox for 30 days. In general now with me 16 in this role and the economic disadvantage 17 that I have against Sony, I can't really 18 afford to pay developers to either skip 19 PlayStation or to create poor experiences on 20 PlayStation with kind of large high profile 21 games. So, we tend to focus on the games 22 that we're building with our own developers, 23 or in certain instances there are smaller 24 developers that can only focus on a single 25 platform just through bandwidth of their own 122 1 P. Spencer - Highly Confidential 2 where we might work with them to ship first 3 on Xbox. 4 But in general, when you look at 5 games from large publishers, a game like 6 Avengers that has Spiderman on PlayStation 7 but the Spiderman character was missing on 8 Xbox, Call of Duty with certain modes, 9 Destiny, a game from a studio named Bungie 10 that had certain quests and weapons, Sony's 11 paid those developers to not put those on 12 Xbox. And I'm not really in a financial 13 position with Xbox to pay developers to do 14 the same thing with PlayStation. 15 Q. This financial position -- well, 16 strike that. 17 If you had the financial 18 wherewithal, would you pay a developer to 19 skip or deprecate the experience on a rival? 20 A. I understand that this answer is 21 one of just my word. I believe in the growth 22 of the gaming business and providing value to 23 our players and to circle on Game Pass which 24 has been a topic. I would prefer to invest 25 our resources, both financial and people, in 123 1 P. Spencer - Highly Confidential 2 building features that actually make playing 3 on Xbox more fun, more accessible through 4 things like xCloud or cross-play than 5 punishing Sony. Don't have anywhere in our 6 strategy or in my head a goal of punishing 7 Sony, including in this deal, but I'm sure 8 we'll get there at some point. 9 So, no, I would not -- I would not 10 actively go and try to pay to hurt Sony or 11 PlayStation. And I think we -- we've shown 12 with, say, Minecraft, a game that we own, 13 that in practice we are not doing that. 14 Q. And we will get to this, but if 15 Microsoft owns a studio and its first-party 16 content, Microsoft doesn't have to pay to be 17 content exclusive for Xbox, right? 18 A. No, we do not have to pay our own 19 studios to create exclusivity. 20 Q. And Microsoft has launched certain 21 titles that are exclusive to Xbox and are not 22 available on PlayStation, correct? 23 A. We have launched titles from our 24 own studios that are not available on 25 PlayStation. We don't launch games that are 124 1 P. Spencer - Highly Confidential 2 exclusive to our console. We launch games on 3 PC and console on almost every instance on 4 the same day. And if for the games that are 5 in Game Pass they're also available on cloud, 6 so that anybody with a web enabled device, 7 whether it's a Chromebook or a PC or an 8 Android phone, an iOS phone can play those 9 games. So, I don't consider them exclusive 10 to our Xbox console, given the number of 11 places that somebody could play those games. 12 Q. That's a fair point. Let me put a 13 finer point on it. 14 Microsoft Gaming, first-party 15 studios have launched games that are 16 available in many places and many devices, 17 but skipped PlayStation, correct? 18 A. We have launched games on 19 PlayStation and Switch, and we have launched 20 games that are not on PlayStation and 21 Nintendo Switch. We make our decisions 22 usually on a case-by-case basis, and we're 23 one of the bigger publishers on Nintendo 24 Switch and Sony PlayStation with the work 25 that we do on Minecraft. 125 1 P. Spencer - Highly Confidential 2 Q. Understood. 3 The 95/5 split in the PC store that 4 you were going to offer Activision, you're 5 going to lose money on that deal, that aspect 6 of the deal? 7 A. Yes, our general accepted cogs, of 8 cost of goods sold in our digital stores is 9 probably seven or eight percent when you take 10 out credit card processing and fraud and 11 customer support and other things. So, at 12 95/5, our expectation is that we are not 13 profiting on those transactions in our store. 14 Q. What about the 80/20 on console 15 store, is that profit 80/20 for Microsoft? 16 A. This is a little bit longer, so if 17 we don't want to go here, feel free to cut me 18 off. 19 The console business is different 20 'cause when we sell a device we subsidize the 21 hardware cost when somebody purchases it. 22 So, to accurately answer that, you would 23 need -- when somebody buys an Xbox Series X, 24 the larger of the console, the subsidy is 25 roughly $200, meaning the cost of us selling 126 1 P. Spencer - Highly Confidential 2 is roughly $200 more than the retail price. 3 So, to really look at 80/20 from a profit 4 lens on console, you would need to amortize 5 our subsidy over the number of users and to 6 try to calculate. The closest approximation 7 I can give is all up, the Xbox business today 8 runs at a single digit profit margin. So, at 9 80/20, given the amount of transactions are 10 at 70/30, 80/20 is likely an unprofitable 11 transaction for us, or close to breakeven 12 given all the subsidies that are included. 13 But it was one difference between 95/5 and 14 80/20 is the subsidized hardware model that 15 consoles have. 16 Q. In the last sentence of that 17 paragraph: 18 The deal for us drives strategic 19 value and growth in our core gaming pillars. 20 What are the core gaming pillars to 21 which you are referring? 22 A. I don't remember on 2020 what our 23 gaming pillars would be. 24 Q. Is console a gaming pillar? 25 A. Console is not a gaming pillar for 127 1 P. Spencer - Highly Confidential 2 us. If you -- I know I'm crossing documents 3 now, but if we went to the Sega document that 4 we looked at that was in a similar time, it 5 had our strategic imperatives at the top of 6 growth on PC, growth on mobile and then Game 7 Pass growth. Those feel more like the gaming 8 pillars at this time. We don't have a 9 specific console pillar so to speak. 10 Q. Is Game Pass a gaming pillar? 11 A. Today it is not. So, we just 12 launched -- we just put out our strategic 13 memo, and our strategic memo is much more 14 about growing off of platform and increasing 15 the efficiency of our business. A key 16 strategic pillar for us right now is 17 continuing to grow off of console. So, PC 18 Game Pass is clearly an important pillar for 19 us right now. 20 Q. Why offer economics to Activision 21 that are breakeven for losses? 22 A. The fear that Sony might pay 23 Activision to skip Xbox console with key 24 franchises 'cause I need to somehow secure. 25 I don't have in our P&L the -- I'm chartered 128 1 P. Spencer - Highly Confidential 2 with running a profitable business with the 3 Xbox business inside of the company. So, I 4 can't write big upfront checks like some of 5 my competitors to these partners, so I have 6 to look at the marginal economics as a way to 7 continue to try to secure content. And 8 that's why you see -- I can't afford to lose 9 more content after losing some games, Final 10 Fantasy 16, Fospoken from Square Enix, Death 11 Loop and Ghostwire from Bethesda, these are 12 games -- like I said, like third-party games 13 that were paid to skip Xbox, I can't afford 14 to have more of those. 15 Q. Why not, what happens if a game 16 like that skips Xbox? 17 A. It was critical aspect for us is 18 developer focus on the platform where if 19 developers lose confidence that Xbox is a 20 viable platform, Sony won't have to pay 21 developers to support our platform, they will 22 just assume it's kind of a dying platform. 23 So, if key big noteworthy titles skip Xbox 24 given our market position of rough- -- in 25 third place behind PlayStation and Nintendo, 129 1 P. Spencer - Highly Confidential 2 there's a concern I've always had that we 3 will effectively become irrelevant in the 4 console market. 5 MR. WEINGARTEN: Let's look at 6 PX1514, 1-5-1-4, please, let's 7 introduce that. 8 (Exhibit PX1514, E-mail chain, 9 Bates MSFT-2R-03733004, was 10 introduced.) 11 BY MR. WEINGARTEN: 12 Q. So, PX1514 -- 13 A. Yeah, it's open. 14 Q. Okay. So, this is an e-mail chain, 15 starts -- well, shouldn't say start, the top 16 e-mail is from you to gaming leadership team, 17 correct? 18 A. Yes. 19 Q. And this e-mail chain involves 20 e-mails that are sent the day after the one 21 we just looked at, these are sent on 22 January 28th, correct? 23 A. I don't remember the date, but it 24 was January of 2020. I will trust that was 25 the date, yeah. 130 1 P. Spencer - Highly Confidential 2 Q. And I want to look at the document 3 that is on page 001, Plaintiff's 4 Exhibit 1514, and I want you to look at, if 5 you could, please, second paragraph from the 6 bottom says, Our engagement next week. 7 Do you see that? 8 A. Yeah. Can I take a second and just 9 read down to there? 10 Q. Yep. 11 A. (Document review.) 12 Actually, just for completeness, 13 I'm gonna start at the bottom, if that's 14 okay? 15 Q. Sure. 16 A. (Document review.) 17 Okay. Thank you. 18 Q. Sure. So, the second to last 19 paragraph on page PX1514-001, another e-mail 20 that you sent to Ms. Hood and Mr. Nadella's 21 on it and several others, correct? 22 A. Yes. 23 Q. Okay. And that paragraph starts: 24 Our engagement next week with ATVI 25 is about getting their support for Xbox Game 131 1 P. Spencer - Highly Confidential 2 Pass/xCloud. 3 A. Yes. 4 Q. ATVI verbally agreed to this if we 5 can get the platform economics right. 6 You see that? 7 A. I do. 8 Q. And then you wrote: 9 We are offering a combination of 10 store royalty split, co-marketing and some 11 other cost savings on their part. 12 So, store royalty split, does that 13 refer to the 80/20 and the 95/5 splits that 14 we were just discussing? 15 A. It does. 16 Q. And now here when you see that 17 language co-marketing and some other cost 18 savings, so that means that Microsoft is 19 actually offering to pay some cost that 20 a partner like Activision would normally pay? 21 A. So, yes. On the co-marketing 22 specifically, because we had that point 23 prior, typical deals would be, we offer a 24 certain marketing commitment in dollars, they 25 would then match in dollars that commitment 132 1 P. Spencer - Highly Confidential 2 and we would secure our platform branding in 3 the marketing that they do. So, that's what 4 that structure would look like, but we would 5 be offering money, they would be offering to 6 match those funds and we would see that as 7 marketing for a game on our platform, yes. 8 Q. So, this is additional economics 9 that Microsoft is offering to Activision, 10 correct? 11 A. Yeah, I'd say the different -- yes, 12 the difference is we get value for brand 13 exposure here, that's why it's co-marketing 14 because we're both marketing our platform. 15 And frankly those funds come out of marketing 16 line item, and our P&L is just a way for us 17 to market our platform. 18 Q. The next sentence you wrote to 19 Ms. Hood and Mr. Nadella and others: 20 Getting Call of Duty and Overwatch 21 in XGP would be a big win for us. We plan on 22 landing this next week. 23 Do you see that? 24 A. I do see that. 25 Q. XGP is an acronym for Game Pass? 133 1 P. Spencer - Highly Confidential 2 A. Xbox Game Pass, yes. 3 Q. Okay. Why is getting Call of Duty 4 and Overwatch a big win for Microsoft? 5 A. Activision -- 6 Q. Strike that. Let me ask -- sorry, 7 Mr. Spencer. Let me just ask you a better 8 question. 9 What did you mean when you wrote 10 that? Why would getting Call of Duty and 11 Overwatch in Game Pass be a big win for 12 Microsoft? 13 A. Activision, for the most part, was 14 the sole partner that we had who had not 15 participated in Game Pass and we -- we 16 realized that in order for Game Pass to be 17 successful, as it was stated in the other 18 document, our partners need to find success 19 in the business model of Game Pass. So, for 20 Sarah and I, Activision was a partner who we 21 had yet found a good match for how Game Pass 22 can be seen by them as incremental and 23 positive to their business. And getting 24 Activision on board with Game Pass, we saw as 25 a good really test of our strategic and 134 1 P. Spencer - Highly Confidential 2 economic ability to prove to partners that it 3 would be a positive part of their business. 4 Q. In your experience negotiating with 5 Activision, were they a tough partner to 6 negotiate with? 7 A. Yes, they were. 8 Q. Are they one of the tougher 9 negotiators among the developers and 10 publishers that you've involved -- interacted 11 with? 12 A. Sir, I think all of my partners are 13 tough and well business minded. But, yes, 14 Activision is -- Activision was some of the 15 more difficult conversations that we had. 16 Q. Did Activision ultimately agree to 17 put Call of Duty in Game Pass? 18 A. No, they did not. 19 Q. Did Activision ultimately agree to 20 put Overwatch in Game Pass? 21 A. They did not. 22 Q. Did -- let me strike that. Let me 23 get even more foundational. 24 Did you ultimately reach an 25 agreement with Activision for having 135 1 P. Spencer - Highly Confidential 2 Activision content in the Xbox ecosystem? 3 A. We did. 4 Q. And was Game Pass for any 5 Activision title a part of that deal? 6 A. It was not. 7 Q. Was cloud for any Activision title 8 a part of the deal between Microsoft and 9 Activision that you were negotiating in 2020? 10 A. We were unsuccessful in getting 11 them to adopt xCloud. 12 Q. Did Activision explain to you -- 13 well, strike that. 14 Your e-mail here says: 15 ATVI has verbally agreed to this. 16 A. Yes. 17 Q. Meaning support for Game Pass and 18 cloud, right? 19 A. Yes. 20 Q. What changed? Why didn't they 21 ultimately place titles on Game Pass or 22 cloud? 23 A. I can't specifically say what 24 changed on their side. I can just say that 25 as negotiation continued, they pulled back 136 1 P. Spencer - Highly Confidential 2 the verbal agreement we had on Game Pass and 3 xCloud. 4 Q. Did they tell you why? 5 A. Not specifically. 6 Q. Do you have any understanding of 7 why they pulled back from Game Pass and 8 cloud? 9 A. I don't. And the reason -- I 10 don't. I don't know why they pulled back 11 from Game Pass or xCloud. I don't. I don't 12 have a specific answer. 13 Q. Why do you think they pulled back 14 from Game Pass and xCloud? 15 A. I don't know. 16 Q. You never thought about it? 17 A. There are many different reasons 18 that it could be. So, in giving an answer 19 that has any kind of authority, I struggle. 20 There could be third-party relationships, 21 there could be third-party deals that were 22 done, there could be many things that I don't 23 have visibility into. So, I can't -- I can't 24 really take the negotiation and surmise why 25 they made the decision they did because I 137 1 P. Spencer - Highly Confidential 2 don't have all of their data. And I don't 3 want to guess that I -- 4 Q. I don't want you to guess about 5 what Activision was thinking. I'm just 6 saying from your perspective, on your side of 7 the table based on any conversations you had 8 with your team, the information available to 9 you from the negotiations, your knowledge, 10 why do you think they dropped out of Game 11 Pass and xCloud? 12 A. I don't -- I'm not trying to be 13 difficult. I don't have a great answer. The 14 more -- I don't have a great answer. 15 Q. I'm not trying to be difficult 16 either, I'll just take your best, most 17 accurate answer, your truthful answer, 18 however great, not great you think it is. 19 A. In general, I would say that any 20 negotiation keeping more option value, more 21 options on your side of the table, gives you 22 more leverage down the road. So, making 23 commitments that have longer term 24 ramifications reduces your position of 25 negotiation. So, if they -- 138 1 P. Spencer - Highly Confidential 2 Q. Can you please -- go ahead. 3 A. If they thought they could land the 4 negotiation without Game Pass and xCloud, 5 it's just an item they didn't have to give up 6 in order to land our PLA together. 7 And I would imagine, and I know I 8 keep coming back to this, they understand 9 with some of the third-party games skipping 10 Xbox that had been announced, that we are 11 probably feeling vulnerable on our platform 12 position and believe that they could land the 13 deal without Game Pass and xCloud, and they 14 turned out to be right. 15 Q. Can you explain to me whether, and 16 if so, how, Microsoft's deal with ZeniMax may 17 have impacted how this negotiation went with 18 respect to Game Pass and xCloud? 19 A. I don't remember a specific 20 conversation on that point. Any time we 21 would acquire content, we would make sure we 22 talked to our partners or publishing partners 23 about our need for them to continue to be 24 successful on our platform. In general 25 about -- of our software game revenue on our 139 1 P. Spencer - Highly Confidential 2 platform, about 70 percent of it is 3 third-party, 30 percent-ish, sometimes less 4 is first-party. Our goal is to roughly 5 continue that ratio, we're not trying to grow 6 the percentage of first-party revenue on our 7 own platform, but when we would acquire other 8 content, partners might ask, do you still 9 need us? If you looked at the P&L of the 10 business you would see that a vast majority 11 of our business is on third-party sales on 12 our platform. 13 So, absolutely we need 14 third-parties to be successful. I don't 15 think it -- so, there might have been some 16 test on how much we felt we needed to not 17 have games skip Xbox given the acquisition of 18 Bethesda. 19 Q. Let me -- let me ask you this: 20 When you say "Bethesda," does that also mean 21 ZeniMax in this context? 22 A. Yeah, I apologize, yes. 23 Q. And remind -- remind us again, 24 please, when did Microsoft know of this 25 acquisition of ZeniMax/Bethesda? 140 1 P. Spencer - Highly Confidential 2 A. Let me do the math. Two years ago 3 September, so September of 2020, I believe. 4 Q. And I appreciate you were talking 5 in generalities about the impact that the 6 ZeniMax Bethesda announcement may have had on 7 some of your third parties. 8 Can you explain how that applies to 9 the negotiation with Activision that we've 10 been talking about that happened in 2020? 11 A. I don't think it -- so this 12 would've been before that. 13 You asked about the ZeniMax 14 acquisition and how it might've played a 15 role. I was saying I don't think it did. 16 And then your subsequent question I was 17 pontificating on a framework where maybe it 18 would have, but I don't believe at the 19 substantive level that our Activision Xbox 20 negotiation was impacted by ZeniMax. 21 Q. And so, at the end of the day, I'm 22 still trying to understand why you think it 23 is that Activision decided not to include any 24 titles in Xbox game cloud -- strike that -- 25 Xbox, xCloud or Game Pass? 141 1 P. Spencer - Highly Confidential 2 A. What we find in the market, and I 3 don't know if it's true in Activision 4 Blizzard, is certain parties are afraid of 5 repercussions from our competitor, if they 6 support specific platform initiatives that we 7 might have. That was never relayed to me as 8 part of the Activision discussion, but other 9 publishers have talked to me about how too 10 much support for Xbox might hurt them in some 11 other relationships. 12 Q. And what other relationships? 13 A. With Sony. 14 Q. How would support for -- what is 15 your understanding how support for Xbox from 16 Activision would hurt Activision's 17 relationship with Sony? 18 A. Again, I don't -- I don't know why 19 Activision did not sign Game Pass and xCloud, 20 so we're kind of down this path now of me -- 21 you've said you'll accept my kind of ideas, 22 which I'm a little bit uncomfortable with, 23 but I'm trying to go down this path of ideas. 24 I'll just say then if you push me for 25 specifics on the ideas that I come up with, 142 1 P. Spencer - Highly Confidential 2 you're gonna poke through the tinfoil pretty 3 quickly. 4 In the case of why would somebody 5 not partner with Xbox on one of our platform 6 initiatives, so I'm just using a body of 7 knowledge which is broader than Activision to 8 say that there are certain partners, whether 9 it's being on stage with us at a show 10 announcing their game with us even if the 11 game is coming to all platforms where other 12 platforms' view on them announcing things or 13 doing things with us is weighed into their 14 decision criteria. So, I have no specifics 15 on that with Activision. But when you're 16 asking me to continue to come up with ideas 17 for why Activision might pass, I'm just going 18 through my kind of catalogue of things I've 19 seen in the industry. 20 In the end, I think my first answer 21 would be the one specific to Activision that 22 I would probably stay with, which is if they 23 felt that with the co-marketing deal for 24 Diablo 4 and Overwatch and Diablo 2 25 Remastered, which I think were the three that 143 1 P. Spencer - Highly Confidential 2 we ended up landing, they could get that 3 overall deal landed without including Game 4 Pass and xCloud. I think for them they would 5 just see that as much as they need to do 6 given the position we were in with other 7 third-parties skipping Xbox at the time. 8 Q. Tell me more about that. What is 9 the source of Activision's leverage that you 10 just described vis-à-vis a situation where 11 some third-parties had been skipping Xbox? 12 A. It's the same leverage any 13 publisher of a known game has when they skip 14 our platform that they realize that we're a 15 distant third in the console space, and so we 16 are the weakest of the three players of Sony, 17 Nintendo and Xbox. And consequently, we're 18 just not in a position to negotiate as hard 19 as a Sony would be on these deals. And as 20 other third-parties are either skipping our 21 platform or co-marketing for games like Red 22 Dead Redemption 2 from Take-Two go to Sony 23 and co-marketing for FIFA, one of the biggest 24 games on the plant is owned by Sony, 25 co-marketing for Call of Duty is owned by 144 1 P. Spencer - Highly Confidential 2 Sony, third-party partners can see that for 3 Xbox, we were not in the strongest position 4 to negotiate against teams that might be 5 financially incented by others to skip us. 6 MS. WINKINSON: James, can we go 7 off the record for a moment? 8 MR. WEINGARTEN: Sure. Off the 9 record, please. 10 THE COURT REPORTER: We're off the 11 record. 12 (Off-the-record discussion was 13 held.) 14 THE COURT REPORTER: We're back on 15 the record. 16 MR. WEINGARTEN: Let's take a 17 ten-minute break, please, and let's be 18 back at, you know, 3:20, 3:25. 19 Thank you very much. 20 THE WITNESS: Thank you. 21 MR. WEINGARTEN: Off the record, 22 please. 23 THE COURT REPORTER: We're off the 24 record. 25 (Whereupon, a lunch recess was 145 1 P. Spencer - Highly Confidential 2 taken.) 3 THE COURT REPORTER: We're back on 4 the record. 5 BY MR. WEINGARTEN: 6 Q. Mr. Spencer, during your last 7 break, did you talk about the substance of 8 this deposition with anyone? 9 A. No. 10 Q. Did you talk about the answers that 11 you've given thus far today in this testimony 12 with anyone? 13 MS. WINKINSON: I'm going to 14 object if you can answer without 15 revealing any privileged information. 16 THE WITNESS: I don't know if 17 that -- 18 MS. WINKINSON: Did you talk to 19 anyone other than your lawyers about 20 anything related to this deposition? 21 THE WITNESS: No. 22 Q. I'm going to press a little, and 23 I'll leave room for an objection. 24 Did you talk to your lawyers during 25 the break about the substance of your answers 146 1 P. Spencer - Highly Confidential 2 today? 3 A. I definitely talked to the lawyers 4 about how it's going, substance of answer I 5 think is probably more specific than how I 6 would characterize what we said. 7 Q. As a result of either conversations 8 with your lawyers that you had during the 9 break, are you planning to answer my 10 questions differently? 11 A. I am not. 12 Q. Let's talk about consoles. 13 Would you agree -- let me strike 14 that. 15 Have you ever reached the 16 conclusion, sir, that Xbox "lost the console 17 wars," to Sony and Nintendo? 18 A. Have I reached that conclusion? 19 Yes. 20 Q. And what does lost the console wars 21 mean? 22 A. In a relatively fixed market size 23 of console games globally, we have no 24 opportunity to kind of improve our 25 third-place standing. 147 1 P. Spencer - Highly Confidential 2 Q. And did you ever tell Mr. Satya 3 Nadella that your view, Xbox had lost the 4 console wars? 5 A. That doesn't sound like the 6 language I would use with Satya, so I would 7 question whether I would say it that way. 8 Q. Did you ever report to the board of 9 directors of Microsoft that Microsoft had 10 lost the console wars to Sony and Nintendo? 11 A. Again, on the terminology, I don't 12 remember specifically using those terms. I 13 have made it clear that our path in gaming 14 has to go beyond the console. 15 Q. And the path for Microsoft going 16 beyond the console, is that a horizon one, 17 two or three objective? 18 A. It's a near-term objective. 19 Q. As of today, is it fair to say that 20 the Xbox console business remains a key part 21 of Microsoft Gaming? 22 A. The console business, which is I 23 think the term you used, is not a 24 consequential part of Microsoft all up, the 25 profit we generate is just too small for the 148 1 P. Spencer - Highly Confidential 2 number of people that we employ. 3 Q. And are you talking about Microsoft 4 Gaming there or all of Microsoft? 5 A. Xbox obviously exists inside of 6 Microsoft, so the trade-offs we make in Xbox 7 have to fit within the construct of the 8 company. 9 Q. And what's the metric -- when you 10 say you reached the conclusion that Xbox lost 11 the console wars to Sony and Nintendo, what's 12 the basis for that conclusion? 13 A. Our market share. 14 Q. How are you defining market share 15 there? 16 A. Global market share for console 17 between Nintendo, Sony and Microsoft Xbox. 18 Q. And does that include all 19 generations of console? 20 A. I look at it through both lenses of 21 users today as well as console sales today. 22 Q. And you're saying "to date," 23 meaning lifetime of the Xbox brand? 24 A. Now. Currently. I look at current 25 console sales in addition -- alongside 149 1 P. Spencer - Highly Confidential 2 overall installed base of users for each 3 console family. 4 Q. And so your conclusion that Xbox 5 has lost the console wars is based on your 6 view of the market share data for sales of 7 consoles and install base; is that fair? 8 A. Yes. 9 Q. When you're talking about installed 10 base, is that installed base across all 11 generations of console or just for Gen 9? 12 A. Let's say active install bases, so 13 players on different consoles at this point. 14 Q. Is it fair to say -- well, let me 15 ask you this: If you lost the console war, 16 when did it end? 17 A. For Xbox, we lost the -- I don't 18 love the term "war," but we lost the 19 competitive battle during the Xbox One 20 generation, so the prior -- 21 (Cross-talk.) 22 Q. What year? 23 A. 2000 -- I'd have to go back and 24 look at the specific launch dates for the 25 Xbox One, the entire generation. I can 150 1 P. Spencer - Highly Confidential 2 probably back into it, but there would be 3 more efficient ways to look at the dates. 4 Q. That's okay. 5 So, your view is -- am I right, 6 that your conclusion is that Xbox lost the 7 console war to Sony and Nintendo and it lost 8 it in a generation of consoles that included 9 Xbox One? 10 A. I wouldn't characterize it as a 11 point in time, but I would say the generation 12 where we took such a step back that was from 13 a market share perspective, that was -- made 14 it not financially viable for us to recover 15 was the Xbox One generation. 16 Q. And how do you mean not financially 17 viable to recover? Microsoft continued 18 developing and selling Xboxes after the Xbox 19 One, right? 20 A. We did. 21 Q. So, how is it that Microsoft, in 22 your words, was not able to financially 23 recover from the Xbox One launch? 24 A. You were specifically asking me 25 about console competition, to win in the 151 1 P. Spencer - Highly Confidential 2 console space. The gaming industry all up I 3 think is a vibrant industry going through 4 transformation where we can compete. 5 Q. I guess what I'm trying to get at 6 is, you concluded that Microsoft Xbox lost 7 the console wars to Sony and Nintendo and 8 lost the war with the Xbox One generation of 9 consoles. 10 So, why has it lost the war? And I 11 guess I'm trying to understand what that 12 means. If it lost the war, did Xbox continue 13 developing a Gen 9 console? 14 A. We did continue to develop a Gen 9 15 console, yes, we did. 16 Q. And in fact, Microsoft launched a 17 Gen 9 Xbox console, right? 18 A. Yes, Xbox launched a Generation 9. 19 Q. Okay. And did you expect to lose 20 when you launched the Gen 9 console? 21 A. We still expected to be in third 22 place relative to Sony and Nintendo for this 23 generation. 24 Q. So, why launch a console? 25 A. The gaming industry is going 152 1 P. Spencer - Highly Confidential 2 through a transition of players playing on 3 many devices, and we feel like we can be a 4 great platform for developers and players to 5 play the games they want with the people they 6 want on the devices where they want to play. 7 Q. I'm still not sure if that answered 8 the question of why, if you lost the console 9 wars, would the Generation 8 launch of Xbox 10 One, why launch a -- 11 THE COURT REPORTER: I'm sorry. 12 Can you repeat the end of that? 13 Q. Why launch a Generation 9 console? 14 MS. WINKINSON: I'm going to 15 object to asked and answered. I think 16 you asked him the exact same question. 17 Q. How much money did Microsoft invest 18 to develop and launch the Generation 9 Xbox 19 console, ballpark? 20 A. I don't have a good answer for a 21 specific amount that we invested, maybe a 22 billion dollars. 23 Q. Why -- what is your understanding 24 of why Microsoft invested a billion dollars 25 to compete with a Generation 9 console after 153 1 P. Spencer - Highly Confidential 2 it had lost the console wars? 3 A. There are three billion people who 4 play video games on the planet. The industry 5 is about $200 billion in revenue, all up, 6 most of those players playing off of console. 7 For us, we felt we had an opportunity to help 8 connect player and creators of games, and the 9 creators of the games are building games on 10 our console. Without having a console in 11 market, you'd really have no developer 12 engagement to help us connect players' 13 engagement across all devices. 14 Q. Given that, what you just said, is 15 having a console offering a necessary part 16 for Microsoft Gaming to compete in the gaming 17 industry today? 18 A. No. 19 Q. How does that reconcile with what 20 you just said about needing to offer a 21 console for developers, et cetera? 22 A. Keeping our console relevant and 23 engaged with developers, I believe gives us 24 the best opportunity to be relevant in the 25 future of gaming, but there are other options 154 1 P. Spencer - Highly Confidential 2 that you could take, other strategic 3 decisions you can make that are not 4 continuing to build the console. 5 Q. The decision that you have made as 6 the leader of Xbox/Microsoft Gaming that 7 Microsoft Gaming should continue and will 8 continue to invest in console; is that right? 9 A. We're continuing to invest in the 10 Xbox console, yes. 11 Q. Okay. And why are you continuing 12 to invest in Xbox console despite your 13 conclusion that you lost the war? 14 A. Because our console -- we have 15 developers that focus on our console platform 16 and we believe that we have the opportunity 17 to make games that are running on our console 18 available to more players across more 19 devices. 20 Q. So, in your view and understanding 21 of the strategy for gaming, you have chosen 22 to continue offering an Xbox console into the 23 future as part of your strategy, correct? 24 A. We have chosen to continue to build 25 Xbox consoles as part of our strategy, 155 1 P. Spencer - Highly Confidential 2 correct. 3 Q. And I take it, am I correct, that 4 your objective in continuing -- one of your 5 objectives in continuing to offer consoles is 6 to do so in a manner that makes as much 7 economic sense for Microsoft as you can, 8 correct? 9 A. In our inroads in the gaming 10 industry all up, yes. 11 Q. Is Microsoft Gaming presently 12 planning to launch a Gen -- strike that. 13 Is Microsoft Gaming developing a 14 Gen 10 console? 15 A. We are not currently developing a 16 Gen 10 console. 17 Q. Have you started discussing among 18 the gaming leadership team and the Microsoft 19 senior leadership team about offering a 20 Generation 10 console? 21 A. We have started early discussions 22 on what a next generation could look like. 23 Q. Have you discussed a launch date 24 for Gen 10 Xbox console? 25 A. We have roughly talked about 2027 156 1 P. Spencer - Highly Confidential 2 or 2028 as potential launch years. 3 Q. And do you have, in your mind, any 4 understanding, ballpark, of the investment 5 cost for Microsoft to develop, build and 6 launch a Gen 10 console? 7 A. I would use my same billion dollar 8 number as some kind of rough approximation. 9 Q. And as of today, is it your 10 understanding of Microsoft Gaming strategy 11 and plans that Microsoft will continue to 12 develop a Gen 10 console? 13 A. I think that question remains to be 14 answered. For planning purposes, we are 15 assuming that Gen 10 would happen until it's 16 proven that it should not. 17 Q. What are the factors that would 18 potentially lead you to no longer offer a 19 Gen 10 -- strike that. 20 What are the factors that would 21 lead you as leader of Microsoft Gaming to 22 decide, you know what, we're just not gonna 23 do anymore console, we're not gonna offer a 24 Gen 10? 25 A. If we're not able to gain relevance 157 1 P. Spencer - Highly Confidential 2 off of console and expand the market 3 opportunity for us in Xbox, I would not 4 encourage us to do another console. 5 Q. I think you said, it is your 6 current planning at Microsoft to grow off 7 console and develop a console device, right, 8 for Gen 10? 9 A. Those two are very -- they're both 10 big concepts and they're kind of unrelated. 11 I would say the first one is an imperative, 12 our business must grow off console otherwise 13 this business makes no sense for us. 14 The second consideration of I have 15 to keep teams focused on what we might be 16 able to do so that we have the opportunity to 17 make a decision on a Generation 10 console 18 down the road. 19 MR. WEINGARTEN: Let's take a look 20 at PX1114, please. 21 (Exhibit PX1114, Gaming CSA-SLT 22 Strategy Review 2205-vFinal, Bates 23 MSFT-2R-09343940, was introduced.) 24 BY MR. WEINGARTEN: 25 Q. And while that's being added to 158 1 P. Spencer - Highly Confidential 2 the -- let me ask you this: When do you have 3 to make a decision on go or no-go for a 4 Gen 10 console? 5 A. It's really driven by the launch 6 date that we would expect to be able to 7 launch. Any final decision later than, say, 8 this time next year is likely a month for 9 month slip in when we would actually be able 10 to launch. 11 Q. And as part of your strategic 12 thinking, do you expect Sony PlayStation to 13 launch a Gen 10 console? 14 A. We expect Sony to launch a Gen 10 15 console. 16 Q. Do you expect Sony to launch a 17 Gen 10 console in that same 2027 to 2028 18 window that you mentioned? 19 A. I think my expectation is they will 20 likely ship earlier than that. And I would 21 expect that Nintendo would also launch their 22 next console earlier than that as well. 23 Q. Did PX1114 appear in the document 24 window for you? 25 A. It did. It's pretty pixillated to 159 1 P. Spencer - Highly Confidential 2 read, so I'm hoping that a paper comes in 3 because this one -- 4 Q. Yeah, I -- what do you mean a paper 5 comes in? 6 MS. WINKINSON: Remember I told 7 you that someone would be coming in 8 with a hard copy after you -- we have 9 someone here printing it out so it's 10 easier for him to read. 11 MR. WEINGARTEN: Oh, I didn't 12 realize that. I didn't hear that. 13 Just for the record, mine is 14 pixillated too, I think that's a 15 function of the production. 16 Q. But let me know if you can make out 17 in the top the part where it says, 18 amyhood@microsoft.com in the header. 19 Do you see that? 20 A. Regretfully I see the bold. So I 21 see, Hello, everyone. Please remember to 22 mute unless actively speaking. The rest of 23 the text -- 24 Q. Okay. Above -- so go above that if 25 you look further up in the document higher up 160 1 P. Spencer - Highly Confidential 2 on the page. 3 A. Yeah. 4 Q. There's a header that says -- 5 THE COURT REPORTER: You cut out. 6 A header that says what? 7 Q. Do you see that? 8 A. I see that there's a header there 9 and I apologize, I just can't read it given 10 the -- what it looks like. It's kind of -- 11 here comes a printout, so this might help me. 12 No, that one's not gonna help. It 13 looks like that. Sorry. 14 Q. That's okay. Mine is also 15 pixillated, I think that was sort of how it 16 was produced. 17 Let's do it this way, turn to 18 page PX1114-008, please. I will represent to 19 you that this document was produced to us 20 with this chat, and the document is called 21 Gaming CSA-SLT Strategy Review 2205-cFinal, 22 okay? 23 Are you looking at the document? 24 MS. WINKINSON: James. Sorry, do 25 you want him to rely on your 161 1 P. Spencer - Highly Confidential 2 representation? Can you tell us the 3 date of the chat? 4 MR. WEINGARTEN: I believe the 5 date of the chat is May 2022. 6 MS. WINKINSON: Thank you. 7 Q. So, if I squint, the chat says 8 May 5, 2022 is the transcript start date and 9 also the end date, okay? 10 A. Thank you. 11 Q. Okay. If that's the title of the 12 document as I just represented to you, does 13 that indicate to you that this document was 14 presented by Gaming as part of a Microsoft 15 strategic leadership team review in May of 16 2022? 17 A. I don't know how to validate that. 18 MS. WINKINSON: James -- go ahead. 19 You go ahead. 20 Q. Did you present to the strategic 21 leadership team about the Gaming CSA in May 22 of 2022? 23 A. I don't remember specifically in 24 May, but I know we did in the springtime. 25 Q. Okay. Does the document that 162 1 P. Spencer - Highly Confidential 2 starts at PX1114-008 and runs through 3 page 045 look like the document that you 4 presented to the SLT in spring 2022? 5 A. It does. I'm only on the first 6 page, but I would say the beginning looks 7 like a document that I'm familiar with. 8 Q. Okay. You believe you've seen this 9 document before, correct? 10 A. I believe I have seen this document 11 before. 12 Q. Okay. What is your role with 13 respect to the document that got presented to 14 the SLT in spring of 2022? 15 A. Head of the Xbox business 16 representing the work behind the document. 17 Q. Can you please turn to page 013? 18 Are you there? 19 A. Yeah. 20 Q. Okay. It says Number 4 Growth 21 Horizon 1 (FY2022), correct? 22 A. Yes. 23 Q. Then FY2022 means fiscal year 2022? 24 A. It does. 25 Q. 4.1 Fiscal Year 2022 Priorities. 163 1 P. Spencer - Highly Confidential 2 For fiscal year 2022, the Gaming Leadership 3 Team has identified three growth priorities. 4 Do you see that? 5 A. I do see that. 6 Q. All right. Number 1 is Accelerate 7 Global Xbox Console Growth. 8 Do you see that? 9 A. I do. 10 Q. And it says that console is our 11 flagship gaming experience. 12 Do you see that? 13 A. Yes. 14 Q. So, despite having concluded that 15 Microsoft lost the console wars, console 16 continues to be Microsoft's flagship gaming 17 experience, correct? 18 A. Our console is the icon of how 19 people think about their Xbox brand. 20 Q. And it is the flagship gaming 21 experience, you wrote, right? 22 A. Yes, that's what's in the document. 23 Q. Okay. And in fact, Microsoft's 24 Gen 9 consoles sold the most ever in a launch 25 month of any Xbox console, right? 164 1 P. Spencer - Highly Confidential 2 A. Relative to our own progress, yes. 3 Q. In the next sentence it says: 4 As we overcome supply limitations 5 this coming year, we must drive Xbox console 6 penetration in our traditional markets. 7 What does it mean to drive Xbox 8 console penetration? 9 A. To sell consoles. 10 Q. Okay. And then it says: 11 We will accelerate every aspect 12 possible to achieve this, including Game Pass 13 catalogue growth, game releases, price point, 14 distribution, marketing and retail. 15 Do you see that? 16 A. I do. 17 Q. And game releases have an impact on 18 driving console penetration? 19 A. It's unclear that they do, but they 20 clearly drive excitement in the community for 21 our brand. 22 Q. And you're going to accelerate game 23 releases, according to this document, to 24 achieve the console goals you've set forth, 25 correct? 165 1 P. Spencer - Highly Confidential 2 A. Relative to our launch cadence the 3 prior year, that was our goal. 4 Q. And accelerate game releases means 5 what? 6 A. Ship more games. 7 Q. Any and all kinds of games or was 8 there focus on particular kinds of games? 9 A. All games in our portfolio. 10 Q. Okay. So, for purposes of this 11 goal, if Microsoft ships -- strike that. 12 For purposes of this goal, if 100 13 free-to-play games for console release, 14 you're indifferent as between that and 100 15 AAA games being released? 16 A. Yes. 17 Q. Okay. Now, it lists here key 18 metrics to evaluate success. One of the key 19 metrics is Xbox Console Month Active Devices. 20 Do you see that? 21 A. I do see that. 22 Q. And the second one, the second 23 bullet for your key metrics to success or to 24 evaluate success is Percent Market Share of 25 Xbox Series Consoles versus PlayStation 5. 166 1 P. Spencer - Highly Confidential 2 Do you see that? 3 A. I see that. 4 Q. And Xbox series console there 5 refers to Gen 9 consoles, right? 6 A. Yes, it does. 7 Q. So, one of the key metrics for 8 evaluating your success in accelerating 9 global Xbox console growth is increasing the 10 share of Xbox's Gen 9 consoles versus 11 PlayStation, correct? 12 A. No. 13 Q. Okay. What is incorrect about 14 that? 15 A. This is specific to an FY22 goal, 16 so a 12-month period from July of 2021 to 17 June of 2022, which is in the year after we 18 launched our console, and we have a specific 19 focus early in our console generation to 20 ensure that we're having a successful launch. 21 Statement made it more of a global statement 22 perpetuity. This is a very time-bounded 23 statement based on FY22. 24 Q. You're going to have a different 25 metric for FY23? 167 1 P. Spencer - Highly Confidential 2 A. We do. 3 Q. What is your metric for FY23 with 4 respect to -- strike that. Let me strike 5 that. 6 For FY23 is accelerate global Xbox 7 console growth or something similar still a 8 goal of the business? 9 A. I don't believe it is, no. 10 Q. Do you have a metric that you're 11 going to evaluate for fiscal year '23 that 12 relates to Xbox's share versus PlayStation 5? 13 A. I'm doing this from memory. I can 14 go back and look at the document. I do not 15 believe in '23 we have a share goal as part 16 of our strategic document, nor do I think we 17 do for '21. 18 Q. Okay. Your listing of share there, 19 your goal in this document -- strike that. 20 Your metric in this document 21 regarding market share is about Xbox series 22 consoles versus PlayStation 5, it does not 23 include Nintendo, correct? 24 A. For the sake of this goal, we do 25 not have Nintendo listed. 168 1 P. Spencer - Highly Confidential 2 Q. Is the Switch Nintendo's most 3 recent generation console? 4 A. It is. 5 Q. And did the Switch launch in 2017? 6 A. I don't have the launch date in my 7 head, but that sounds about right. 8 Q. And in terms of processing power, 9 the Switch is akin to a Generation 8 console, 10 correct? 11 A. No. The Switch gives players the 12 ability to take their gaming experience with 13 them, it's -- it's just a different piece of 14 hardware than what an Xbox is. 15 Q. Can you explain -- go ahead. 16 A. I was gonna say, when I think about 17 processing power, I think about all of the 18 capabilities of the device. 19 Q. Well, let me ask you two questions 20 then. 21 In terms of processing power 22 meaning CPU and GPU, is the Switch more akin 23 to a Gen 8 device or a Gen 9 device? 24 A. In terms of CPU and GPU, it would 25 be more akin to a Gen 8 device. 169 1 P. Spencer - Highly Confidential 2 Q. And in terms of a broader set of 3 characteristics, and I think you were just 4 alluding to, please explain to me the 5 characteristics of the Switch that make you 6 think the Xbox console is a different 7 experience? 8 A. That's not what I meant to say. 9 What I was saying is, when I think 10 about the capabilities of a device, I think 11 about -- and the technology behind making 12 that possible, I think about what the end 13 user perceives. And in the case of a Switch, 14 it has the ability for somebody to take their 15 games with them, it's portable, which is 16 something that neither PlayStation nor Xbox 17 have. 18 Q. Do you think -- in your 19 understanding of this business, do you think 20 the end user used the Switch as a substitute 21 for an Xbox series or a PS5? 22 A. Absolutely. 23 Q. And what are the -- why? 24 A. Because most -- most gamers on the 25 planet can't afford to buy any consoles. 170 1 P. Spencer - Highly Confidential 2 Those that can, purchasing one console is 3 just more cost effective than purchasing 4 multiple consoles. But some level -- 5 THE COURT REPORTER: I'm sorry. 6 You cut out. But some level? 7 A. At some level, a consumer purchased 8 a Switch or a PlayStation or an Xbox. 9 Q. And a Switch is priced at about 299 10 retail; is that right? 11 A. It's the same price as an Xbox 12 Series S. 13 Q. And the PS5 and Xbox X are 499 14 typically at retail? 15 A. Sony just raised the price of the 16 PS5 to 549. 17 Q. Okay. Putting aside price, has the 18 features and characteristics other than 19 price, does the user get the same gaming 20 experience on a Switch that they get on an 21 Xbox series console? 22 A. Outside of the first-party games 23 that might be exclusive to any one of the 24 different platforms, the games that people 25 play on the different consoles tend to be 171 1 P. Spencer - Highly Confidential 2 very similar, which would make me say yes. 3 Q. But first-party titles that are 4 available on one console exclusively might 5 make a difference in how someone perceives 6 whether a console is substitutable? 7 A. No, I was just saying that in order 8 to evaluate whether a customer sees a Switch 9 or an Xbox as replacement for each other, I 10 look at the games that are available on both 11 platforms to see if the same games are 12 popular on both platforms. And when you look 13 at games like Minecraft as an example, it's 14 very popular across all three platforms. 15 Q. Have you ever expressed an interest 16 in acquiring Nintendo? 17 A. I have. 18 Q. Have you ever expressed the opinion 19 that Nintendo should realize that its future 20 exists off of their own hardware? 21 A. I never publically stated that. 22 Q. Well, have you told people in 23 Microsoft that? 24 A. I honestly don't remember if I've 25 said that. 172 1 P. Spencer - Highly Confidential 2 MR. WEINGARTEN: Let's -- can we 3 introduce document PX1208? 4 (Exhibit PX1208, E-mail chain, 5 Bates MSFT-2R-09635948, was 6 introduced.) 7 BY MR. WEINGARTEN: 8 Q. Let me know when you see that, sir. 9 A. I have it up. 10 Q. Okay. This document is an e-mail 11 chain that includes a gentleman named Chris 12 Capossela, C-A-P-O-S-S-E-L-A, and a gentleman 13 named Takeshi Numoto, T-A-K-E-S-H-I 14 N-U-M-O-T-O. 15 See that? 16 A. I do. 17 Q. And the chain is three e-mails that 18 were sent around August 5th and August 6, 19 2020, right? 20 A. Yes. 21 Q. And at the bottom of -- the e-mail 22 at the top from you, Mr. Capossela and 23 Mr. Numoto, last paragraph of your e-mail 24 says: 25 I love this discussion. 173 1 P. Spencer - Highly Confidential 2 Do you see that? 3 A. I see that. 4 Q. You say: 5 At some point, getting Nintendo 6 would be a career moment and I honestly 7 believe a good move for both companies. It's 8 just taking a long time for Nintendo to see 9 that their future exists off of their own 10 hardware, a long time... smiley face. 11 Do you see that? 12 A. I do see that. 13 Q. So, here you're telling 14 Mr. Capossela and Mr. Numoto you think 15 Nintendo's future exists off of Nintendo's 16 hardware, correct? 17 A. Can I take a second just to read 18 the whole mail? 19 Q. Sure. 20 A. (Document review.) 21 Okay. I've read it. 22 Q. Okay. So, you expressed -- well, 23 strike that. 24 MR. WEINGARTEN: Candida, can you 25 just read back my last question, 174 1 P. Spencer - Highly Confidential 2 please? 3 (Referred to portion of the record 4 was read back by the court reporter.) 5 A. My view is in the long run, 6 Nintendo's intellectual property will ship on 7 hardware that they don't build. 8 Q. Let's take a look at the e-mail 9 that started this chain, it's on page 002, 10 it's from Mr. Numoto to you and 11 Mr. Capossela. 12 Do you see that? 13 A. Yes, I read it. 14 Q. The second to last paragraph starts 15 with the words, With gaming. 16 Do you see that paragraph? 17 A. I do see that. 18 Q. It says: 19 With gaming -- let me ask you this: 20 Who's Mr. Numoto, what's his job at the 21 company? 22 A. He runs marketing for our 23 enterprise business. He has no 24 responsibility for gaming. 25 Q. Okay. Why are you talking to him 175 1 P. Spencer - Highly Confidential 2 about gaming then? 3 A. He initiated this with a piece of 4 mail. 5 Q. How often do you talk to Mr. Numoto 6 about gaming? 7 A. Almost never. 8 Q. Mr. Numoto writes: 9 With gaming, while we have been a 10 consistent number two, we have strong 11 franchise, and a secular shift to the cloud 12 (and perhaps immersive MR/VR over time) that 13 can really help us shift our position both 14 vis-à-vis Sony, but also Steam. 15 You see that? 16 A. I do see that. 17 Q. Is Mr. Numoto correct that 18 Microsoft Gaming has a, quote, strong 19 franchise? 20 A. We have a good brand in Xbox. 21 Q. You don't want to say it's a strong 22 franchise? 23 A. I don't think of Xbox as a 24 franchise. But if we want to just make 25 franchise and brand synonyms for each other, 176 1 P. Spencer - Highly Confidential 2 I can. This is Takeshi's words, so you're 3 kind of asking -- I would not have stated it 4 that way. So, I'm agreeing that Takeshi 5 wrote it that way and I will affirm that Xbox 6 is a brand. 7 Q. You think Xbox has a strong 8 business, putting aside this e-mail? 9 A. No. 10 Q. And by "Xbox," do you mean all of 11 gaming or just console? 12 A. Both. 13 Q. So, your opinion as the leader of 14 Microsoft Gaming is that Microsoft Gaming 15 does not have a strong business? 16 A. I think the P&L would prove that 17 out, yes. 18 Q. Okay. Does -- is Mr. Tak- -- 19 sorry, Mr. Numoto correct that there is a 20 secular shift to the cloud? 21 A. More of today's games are 22 service-based games that require some cloud 23 infrastructure to run those games, so in that 24 context, he is. 25 Q. And do you agree that -- with 177 1 P. Spencer - Highly Confidential 2 Mr. Numoto, the first part of the sentence, 3 that we have been a consistent number two -- 4 A. No. 5 Q. -- in gaming? 6 A. No. 7 Q. Did you write in any of your e-mail 8 above to him that he was wrong about any of 9 those three things? 10 A. I think I only responded once and I 11 did not say we are number three in my 12 response. 13 Q. And you didn't say, actually, 14 Mr. Numoto, you're wrong about a couple of 15 your priors here, your assumptions? 16 A. I did not respond in that way. 17 Q. You still think about acquiring 18 Nintendo? 19 A. I don't believe acquiring Nintendo 20 is an opportunity. 21 Q. A different question. That's an 22 answer about availability. 23 Do you think about the potential of 24 acquiring Nintendo? 25 A. I do not think about acquiring 178 1 P. Spencer - Highly Confidential 2 Nintendo in terms of how we will go forward 3 with our Xbox business. 4 Q. Why not? What happened? 5 A. The previous answer that I do not 6 think they're looking to sell. 7 Q. And if Nintendo were to eventually 8 realize, as you put it, that their future 9 exists off of their own hardware, would you 10 want to acquire Nintendo? 11 A. If we had the opportunity to 12 acquire Nintendo, I think it would be a major 13 opportunity for Microsoft. 14 Q. What would be the benefit of 15 acquiring Nintendo? 16 A. There would be multiple benefits. 17 I think there are more than -- it would be a 18 long list. 19 Q. What's at the top of the list? 20 A. Their market position of being -- 21 Q. Market position? 22 A. -- number one in console right now. 23 Q. Would the strength of their own 24 content also be a benefit? 25 A. Absolutely, yeah. 179 1 P. Spencer - Highly Confidential 2 Q. Would you agree that the Xbox Gen 9 3 console is at technological parity with the 4 Sony PlayStation 5? 5 A. We have two consoles in market, the 6 Series S and the Series X. Is there one -- 7 they're not the same technically. 8 Q. Well, let's take a look at the X. 9 The X versus the PlayStation 5, 10 which one is technically superior? 11 A. I would say the Series X is 12 technically superior to the PlayStation 5. 13 Q. And does Sony PlayStation's next 14 generation -- sorry. 15 Does the Sony 9th generation 16 console have different versions like the X 17 and the S or is it just PlayStation 5? 18 A. They have a PlayStation 5 and a 19 PlayStation 5 Digital Edition which removes 20 the disc drive, but doesn't have the compute 21 differences that a Series S and Series X 22 have. And there's, I believe, a $50 price 23 difference between those two PlayStation 5 24 consoles. 25 Q. Okay. In terms of value, if you 180 1 P. Spencer - Highly Confidential 2 take into account technological capabilities 3 and the price of this Series S, do you think 4 the Series S is a comparable offering or a 5 better offering for the customer than the 6 PlayStation PS5? 7 A. We did not build the Series S to 8 compete directly with the PS5 on a 9 head-to-head sales standpoint. It's more 10 focused on new users or PlayStation owners 11 that might want to buy an Xbox. 12 So, no, I don't think Series S 13 competes directly with PS5 for the same 14 customer. 15 Q. Would you agree that looking at 16 the X versus PS5 Xbox has a better product 17 than Sony? 18 A. I might be biased, but I do agree 19 with that. 20 Q. And not just on hardware, but also 21 on the software platform and services on top 22 of the hardware? 23 A. Our software developer platform has 24 been behind PlayStation 5, we are catching 25 up. I think our services are about at parity 181 1 P. Spencer - Highly Confidential 2 in terms of our service capability. 3 Q. I'm trying to go as fast as I can 4 for time sake, for your sake. 5 MR. WEINGARTEN: Let's look at 6 PX1275. 7 A. Okay. 8 (Exhibit PX1275, E-mail chain, 9 Bates MSFT-2R-03620210, was 10 introduced.) 11 A. I have it open. 12 Q. Okay. Do you see the e-mail from 13 you on page 1 there to Mr. Nadella and 14 Ms. Hood, dated March 18, 2020, do you see 15 that, and starts with: 16 Even as I type this I know I 17 shouldn't, but I can't help myself. 18 A. I do. 19 Q. In the third paragraph down, you 20 say: 21 We have a better product than Sony 22 does, not just on hardware, but equally 23 important on the software platform and 24 services on top of the hardware. 25 Is that what you wrote to 182 1 P. Spencer - Highly Confidential 2 Mr. Nadella and Ms. Hood? 3 A. Do you mind if I just read down to 4 this point just to make sure I understand the 5 context? 6 Q. Sure. 7 A. (Document review.) 8 Okay. I've read it. 9 Q. That's what you told Mr. Nadella 10 and Ms. Hood, right? 11 A. In March of 2020, that's what I 12 wrote, yes. 13 Q. And the Gen 9 console from 14 Microsoft, the Xbox S -- sorry, Xbox X and 15 its offering launched in 2020, right? 16 A. It did, in November, yeah. 17 Q. Do you see where you say: 18 We have -- the next sentence: 19 We have the ingredients of a 20 winning plan. I felt the feedback from the 21 BoD discussion on being too confident and 22 maybe this will just reinforce that 23 perception. 24 BoD refers to Microsoft's board of 25 directors? 183 1 P. Spencer - Highly Confidential 2 A. Yes, it does. 3 Q. So, what's the context, were you 4 told that you were -- after discussion with 5 the board of directors, that you were too 6 confident about Microsoft Gaming's future? 7 A. I was told that I came across as 8 too confident in our ability to execute this 9 plan. 10 Q. Can you be more specific about what 11 that confidence that you displayed was about? 12 A. Just our overall Xbox strategy and 13 our ability to execute that strategy in a 14 competitive market. 15 Q. And what did you tell the board 16 that was so confident? If you can summarize 17 for us, please. 18 A. I don't remember the specific -- it 19 was a piece of feedback I received after the 20 meeting, so it wasn't in the meeting. I 21 won't have the moment in time where I was 22 stopped and told that that was too confident. 23 Q. So, sitting here today you don't 24 remember what it was that you were -- let me 25 strike that. 184 1 P. Spencer - Highly Confidential 2 Sitting here today, do you remember 3 anything about what confidence you expressed 4 that led someone to say, hey, don't be too 5 confident? 6 A. The feedback was from an -- I don't 7 remember exactly who gave me the feedback, it 8 was probably either Amy or Satya or maybe 9 Kathleen Hogan. The feedback would've been 10 that the board wanted to make sure that I 11 remained confident. Sorry, I remained humble 12 and not overly confident in our ability to 13 execute our gaming plan. I don't remember it 14 as a specific piece of feedback on any 15 specific thing that I presented. 16 MR. WEINGARTEN: Let's look at 17 PX1517, please. You can put that one 18 aside. 19 (Exhibit PX1517, Roadmap to 2030 20 GLT Pre-Read 04-29-22, Bates 21 MSFT-2R-07683508, was introduced.) 22 A. It's open. I have it open. 23 Q. Okay. The cover e-mail is from 24 Ashley McKissick, M-C-K-I-S-S-I-C-K, from the 25 gaming experiences and platform leadership 185 1 P. Spencer - Highly Confidential 2 team and dated May 22022. 3 Do you see that? 4 A. I do. 5 Q. And subject matter Hardware Deck, 6 attachment Roadmap to 2030 GLT Pre-Read 7 4-29-22. 8 Do you know what this document is? 9 A. I haven't scrolled down, so I 10 don't, looking at the header. 11 Q. Well, take a look at page 2. See 12 if that refreshes your recollection about 13 what Ms. McKissick is forwarding here. 14 Did you ever see this document 15 before? 16 A. This document, yes, I've seen this 17 document before. 18 Q. Was this presented to the game 19 leadership team in or around April of 2022? 20 A. It was sent to the gaming 21 leadership team as a pre-read for a meeting 22 that happened on April 29th. 23 Q. Okay. And on page PX1517-004, you 24 see where it says, Gaming Devices: Path to 25 2030? 186 1 P. Spencer - Highly Confidential 2 A. Yeah. Yes. 3 Q. And the first -- the first heading 4 or the first bullet says Console Business is 5 the Foundation. 6 You see that? 7 A. Yeah, I see that, yes, I do. 8 Q. And if you look at page PX1517-008, 9 it's a chart that says The Path to Leadership 10 in Gaming. 11 Do you see that? 12 A. Sorry, I'm just scrolling down. To 13 17 you said, 017 or 007? 14 Q. 008, please. 15 A. Got it. 16 Q. You see the chart called The Path 17 to Leadership in Gaming? 18 A. Yes. 19 Q. And the chart is a chart of Xbox 20 Game Pass subscribers projected in the 21 future. 22 Do you see that? 23 A. I do see that. 24 Q. And the bulk Xbox Game Pass 25 subscribers for the fiscal year '23 through 187 1 P. Spencer - Highly Confidential 2 fiscal year '30 come from console first and 3 multi-device gamers, correct? 4 A. Yes. 5 Q. Do you agree with the projections 6 that are expressed in this chart? 7 A. I do not believe that that is what 8 the future Xbox business would look like. 9 Q. So, Ms. McKissick is wrong? 10 A. This is a presentation from our 11 devices organization to the gaming leadership 12 team, so this is the view from the team that 13 is chartered with building our hardware on 14 what the future business would look like. 15 I can fairly safely say that if we 16 do not make more progress than this off of 17 console, we would exit the gaming business. 18 Q. And how wrong is she by 2030? How 19 would you rearrange the chart basically to 20 make it more accurate for your projection of 21 2030? 22 A. I wasn't trying to make a 23 projection on 2030, I was saying if this were 24 the outcome that we were trending towards, we 25 would not continue in the business, so the 188 1 P. Spencer - Highly Confidential 2 numbers would go down. So, I wasn't trying 3 to make a counter prediction, I was just 4 saying if this were the outcome, we would -- 5 I don't believe we'd still be in the 6 business. 7 Q. And what outcome are you driving 8 towards so that you could still be in the 9 business? 10 A. Well, a majority of our customers 11 are found off of our own hardware. 12 Q. By 2030? 13 A. I would hope by earlier than 2030. 14 So, when you asked me if I agreed 15 with this chart that the light green and blue 16 depending on what colors you see there would 17 have to be much larger much earlier. 18 Q. And when is it your goal to have a 19 majority of Xbox subscribers off console? 20 A. I would say by FY26, '27 that we 21 should be in that position or we'd have to 22 make a different decision with the business. 23 Q. And do you expect in FY- -- strike 24 that. 25 When you're thinking about that 189 1 P. Spencer - Highly Confidential 2 goal for FY26 or FY27, when you say a 3 majority off console, what do you -- what do 4 you think the split will be off console 5 between PC first and cloud first? 6 A. In terms of users, I don't have a 7 specific answer. I don't have a specific 8 answer in terms of split between PC and 9 cloud. 10 MR. WEINGARTEN: Let's look at 11 PX1145 please. You can put that one 12 aside. 13 (Exhibit PX1145, E-mail chain, 14 Bates MSFT-2R-01810109, was 15 introduced.) 16 A. Did you say 1 -- 17 Q. 1145, please. 18 A. There it is. 19 Q. Let me know when you've had a 20 chance to look at that e-mail, please. 21 A. I'll just go ahead and read it 22 first. 23 (Document review.) 24 Q. Have you had a chance to read it, 25 sir? 190 1 P. Spencer - Highly Confidential 2 A. Yeah, I was just going back, I 3 apologize, I read the thing at the bottom. 4 I'll hurry up. 5 Okay. I got it. 6 Q. All right. I'm going to ask you 7 about your e-mail, it's from you to Tim 8 Stuart on December 4, 2020, subject line Xbox 9 console volume. 10 Do you see that? 11 A. I do. 12 Q. And I take it the context here that 13 there was a supply constraint for Xbox series 14 consoles? 15 A. Yes, yeah, the supply chain issues 16 on consoles. 17 Q. If you look at page 002, the first 18 full -- well, second full paragraph, you 19 wrote: 20 I believe we could be selling 2-3x 21 the number of console we're going to sell 22 this quarter if we had the inventory. 23 You see that? 24 A. Yes. 25 Q. So, but for the supply chain 191 1 P. Spencer - Highly Confidential 2 issues, your belief was that Xbox series 3 would sell two or three times the number of 4 consoles it sold in that quarter; is that 5 right? 6 A. Not completely. If the next 7 sentence talks about the P&L hit of us 8 selling that number of consoles and how I 9 don't have the business flexibility to invest 10 in our hardware subsidy in that way as well, 11 so it's not just the supply of consoles. 12 Q. Right. So, just taking units sold, 13 SKUs, you can sell two to three times the 14 number of SKUs you believe into the 15 marketplace if there weren't these supply 16 issues, just in terms of a matter of demand, 17 correct? 18 A. In this quarter, which is what I 19 think I'm talking about from a demand 20 standpoint, we could sell -- we could've -- 21 what I wrote is we could've sold two or three 22 times the number of consoles that we sold. 23 Q. But economically I hear you saying, 24 it wouldn't make sense to do that because the 25 consoles are sold at a loss; is that right? 192 1 P. Spencer - Highly Confidential 2 A. More than it wouldn't make sense. 3 We are run as a stand-alone P&L and I -- I 4 don't have the authority to make the decision 5 to do that. 6 Q. And then you write: 7 Sony has done -- I'm still in that 8 same paragraph: 9 Sony has done 15 million plus a 10 year in some years and I believe we could get 11 close with our product lineup, price points 12 and game lineup coming. 13 Do you see that? 14 A. I do. 15 Q. Okay. So, again, but for supply 16 issue and the fact that you're responsible 17 for a full P&L, you believe that you could 18 get close to Sony sales of 15 million units a 19 year? 20 A. I was using Sony's 15 as a historic 21 number. I think this year Sony has said -- 22 this year they said they will do 18. But I 23 was using the 15 as a historic number that 24 it's a possible number in the console space 25 for us to sell. 193 1 P. Spencer - Highly Confidential 2 Q. Okay. 3 A. And then I -- 4 Q. Let's look at the paragraph. Go 5 ahead. 6 A. I was just saying that the next 7 sentence I add that given our strategy, I did 8 not believe this is the right place for us to 9 invest. 10 Q. Because it goes to your sense that 11 the console business for Microsoft is not a 12 strong business, right? 13 A. That in addition to the fact that 14 the console business globally is fairly flat 15 at 200 million console households. So, it is 16 a fixed market size where we are number three 17 and at an economic disadvantage to both one 18 and two, and gaming -- gaming is going 19 multi-device. So, our better investment for 20 us is towards the future. 21 Q. Let's look down another couple of 22 paragraphs to the paragraph that starts, On 23 the capital allocation that we are making in 24 gaming. 25 Do you see that one? 194 1 P. Spencer - Highly Confidential 2 A. I do. 3 Q. Start with the bottom of the 4 paragraph, you say: 5 On the other side we have Sony with 6 PS5 and a very analogous hardware subsidy. 7 Sony's gaming P&L runs at lower GM and AM 8 percentage margins than our gaming business 9 even though they have 2x the console IB. 10 GM means gross margin, right? 11 A. Gross margin percentages. 12 Q. And AM means accountability margin? 13 A. Accountability margin percentage, 14 yes. 15 Q. Is that like profit? 16 A. That's the percent of your revenue 17 that you keep in profit. 18 Q. And when you say "IB," that means 19 install base? 20 A. Yes. 21 Q. So, Sony's gaming P&L according to 22 your e-mail here actually has worse margins 23 than Microsoft Gaming; is that right? 24 A. At this point in time, it did. 25 Q. So, would you say at least as of 195 1 P. Spencer - Highly Confidential 2 2020, Sony's gaming business was also not a 3 strong business? 4 A. I would not. Their absolute profit 5 and gross margin is nearly 2x what Microsoft 6 makes. 7 Q. Right. But they have a lower 8 percentage, correct? 9 A. They have a lower percentage, yes. 10 I'll also say Sony is evaluated in a 11 different sector than Microsoft is which 12 makes our GM percentage inside of Microsoft 13 is evaluated differently than Sony's would be 14 inside of the hardware company or an 15 entertainment company. 16 Q. Understood. 17 But apples to apples gaming to 18 gaming, Sony makes less profit per dollar of 19 revenue than Microsoft Gaming, correct? 20 A. At the point that this mail was 21 written, as a percentage basis when -- as 22 much as we can see of their financials, which 23 isn't completely transparent, their GM 24 percentage and AM percentage were lower, 25 which is why I think you see Sony investing 196 1 P. Spencer - Highly Confidential 2 in mobile and PC as well. 3 Q. And then just back at the top of 4 that paragraph, it says -- you say: 5 I believe our investment in content 6 in xCloud are critical to realizing our 7 potential in gaming. Amazon Luna and Google 8 Stadia do not have the console strength we 9 have giving us developer engagement, gaming 10 community and catalogue of content. 11 Do you see that? 12 A. I do see that. 13 Q. So, in terms of streaming and the 14 xCloud offering, having console is a 15 competitive advantage from Microsoft Gaming 16 over Luna and Stadia, is that what you're 17 saying? 18 A. Through our development effort, we 19 built the ability to stream console games, 20 our Xbox console games, which created a great 21 catalogue for our xCloud offering, yeah. 22 Q. Let's talk about Game Pass. 23 How many subscribers does Game Pass 24 have now? 25 A. 25 million. 197 1 P. Spencer - Highly Confidential 2 Q. And that's the same number that I 3 think was announced when the Activision deal 4 was announced. 5 Has it not grown in the last, if 6 you know, eight or nine months? 7 A. It has not. 8 Q. In terms of Game Pass, am I right 9 that Xbox Game Pass includes for a subscriber 10 Xbox Live Gold, plus a library of games, plus 11 a day and date release of AAA first-party 12 games that Microsoft had; is that right? 13 A. No. And let me just describe the 14 three SKUs of Game Pass, might -- just for 15 fast forward. 16 There's an Xbox Game Pass, which 17 has a catalogue of console games including 18 our day and date first-party games, and some 19 rare occurrences of third-party games. 20 There's PC Game Pass which is the equivalent 21 subscription on PC, both of those are 9.99. 22 At 14.99, we have Game Pass 23 Ultimate, that includes both of those SKUs, 24 including Gold which you mentioned and the 25 ability to stream. 198 1 P. Spencer - Highly Confidential 2 Q. Got it. 3 MS. WINKINSON: James. 4 MR. WEINGARTEN: Yes. 5 MS. WINKINSON: I realize you just 6 moved to Game Pass, would it be 7 possible to take our ten-minute break? 8 We're a little over an hour. 9 MR. WEINGARTEN: That's fine, 10 let's do that. We'll see you back at 11 5:30. We can go off the record. 12 THE COURT REPORTER: We're off the 13 record. 14 (Whereupon, a brief recess was 15 taken.) 16 THE COURT REPORTER: We're back on 17 the record. 18 BY MR. WEINGARTEN: 19 Q. Just briefly, we were talking about 20 consoles before and we were talking about 21 Gen 10, and I want to ask, does Microsoft 22 have any plans for any launches of console 23 hardware for Gen 10? 24 A. We periodically do cost reduction 25 versions of our console that many times do 199 1 P. Spencer - Highly Confidential 2 not have kind of customer facing changes, and 3 we are evaluating a few of those, as well as 4 some potential tweaks to the existing console 5 generation, but nothing major. 6 Q. So, let me ask it this way: Is 7 there going to be -- is there current 8 planning for a Generation 9.5 for launch? 9 A. There's not. 10 Q. Okay. We were talking about Game 11 Pass. 12 Is the number of subscribers a key 13 metric by which you and the GLT evaluate 14 success of Game Pass? 15 A. I would say at the highest level 16 there are two metrics, the number of 17 subscribers and the average revenue per 18 subscriber would be the two aggregated 19 metrics that we use to look at Game Pass. 20 Q. What is your goal for subscribers 21 at the end of fiscal year '23 for Xbox -- 22 strike that, for Game Pass? 23 A. We're in the process of 24 reevaluating that number now based on some 25 development trade-offs that we've made 200 1 P. Spencer - Highly Confidential 2 internally. I believe our FY23, which is our 3 current fiscal year exit number, so end of 4 June is 32 million with the revised changes. 5 Q. And what are the development 6 trade-offs that are leading through the 7 revised changes in the number of subscribers 8 that are in your FY23 goal? 9 A. Yeah. We put in trial and 10 marketing family plan, like many 11 subscriptions have, like Netflix or Spotify, 12 and we will likely not be able to execute on 13 the family plan this year, this fiscal year, 14 which will have an impact to our subscriber 15 number. 16 Q. Do you have a plan or number for 17 fiscal year '24 for Xbox -- sorry, Game Pass 18 subscribers? 19 A. I don't have one in my head. I'm 20 sure there are some documents that look out 21 over the next couple of years that might list 22 one, but our financial commitments to 23 Microsoft are year after year. I don't have 24 a firm FY24 Game Pass number. 25 Q. In the gaming division, we saw this 201 1 P. Spencer - Highly Confidential 2 with the hardware deck we looked at, have you 3 talked at the GLT in terms of an FY 2030 goal 4 for various aspects of the business? 5 A. Yes, yeah. I think it was in one 6 of the documents that we brought up was a 7 view of the business in 2030. 8 Q. And do you have a view of the 9 number of Game Pass subscribers that is 10 Microsoft's goal to have for fiscal year 11 2030? 12 A. I don't have a specific number on 13 Game Pass subscribers. Our expectation is 14 that subscription will still remain a 15 minority part of our digital business in 16 2030. 17 Q. And what will make up the majority 18 of the digital business in 2030 in your view? 19 A. The same that it is now, game sales 20 and post-sale monetization on games. 21 Q. Okay. Am I correct that the Xbox 22 Live Gold SKU has a large -- relatively large 23 margin that accrues to Microsoft when you get 24 an Xbox Live Gold subscriber? 25 A. Yes, I want to -- I listed the 202 1 P. Spencer - Highly Confidential 2 three Game Pass subscriptions previously and 3 I failed to mention Gold. So, Gold is a 4 stand-alone subscription, I just -- for 5 completeness, I wanted to make sure I landed 6 that. As an overall gross margin, our Gold 7 subscriber number is now in single digit 8 millions. So, as an overall number, it's 9 driving a smaller part of the business, but 10 their margin percentage on Gold is high. 11 Q. What is the margin percentage on 12 Gold? 13 A. I don't have the specific number in 14 my head. 15 Q. Do you have a ballpark, is it 16 80 percent, is it 20? 17 A. As a ballpark, I would say around 18 70. 19 Q. And that's gross margin? 20 A. That would be gross margin. 21 Q. What's the gross margin ballpark, 22 or exact if you know it, for Game Pass 23 Ultimate? 24 A. I don't have an exact number. Our 25 margin on Game Pass is usually -- depending 203 1 P. Spencer - Highly Confidential 2 on how we want to calculate it, but meaning 3 what time frame we look at is usually in the 4 20 to 30 percent. 5 And I'll just add for completeness, 6 as I mentioned, and it's in the documents we 7 looked at, there's this big hardware subsidy 8 that I'm not really including in the Gold or 9 the Game Pass margin percentage 'cause we 10 tend not to look at our gaming businesses by 11 individual P&Ls. So, at some point you would 12 need to take the hardware subsidy and apply 13 it across all of these businesses, the Gold 14 business and the Game Pass business, to give 15 you a true blended gross margin percentage 16 including that hardware subsidy. 17 I don't know if that's helpful. 18 Q. And conversely to evaluate the 19 console business, you would want to include a 20 view of all the subscription revenues and 21 post-sale monetization that accrue from post 22 console sales? 23 A. Yeah, which is why we look at it as 24 an aggregated business. We basically have -- 25 THE COURT REPORTER: I'm sorry. 204 1 P. Spencer - Highly Confidential 2 You trailed off. 3 A. We have one P&L for the business. 4 I'm trying to just explain that when you ask 5 me the vertical businesses and for a P&L view 6 on those, my answers might not always be as 7 precise because I -- we tend, because of the 8 hardware subsidy, to not look at it that way. 9 Q. Got it. 10 So, because of the hardware 11 subsidy, you don't have necessarily have a 12 console P&L or a Game Pass P&L or a cloud 13 P&L, you have an overall business P&L for 14 gaming? 15 A. Yes. 16 Q. And that's the accurate way to sort 17 of evaluate the health of the gaming business 18 is the overall P&L? 19 A. I mean, it would be the gap way of 20 looking at the business today would be the 21 all up P&L. 22 Q. I appreciate all that, but on a 23 SKU, that's S-K-U, SKU-by-SKU basis, am I 24 right that Microsoft Gaming has a strategy of 25 converting Xbox Live Gold subscribers to Game 205 1 P. Spencer - Highly Confidential 2 Pass subscribers? 3 A. We have tried to convert Gold 4 subscribers to Game Pass subscribers, yes. 5 Q. And even more generally to grow the 6 subscription business at Microsoft, your 7 emphasis is on growing Game Pass, not growing 8 Live Gold; is that right? 9 A. Yes. In terms of growing our 10 subscriptions, we are more focused on growing 11 Game Pass than we are growing Gold. 12 Q. And why is that, if the Game Pass 13 product SKU has such a lower gross margin 14 than the Gold product or SKU? 15 A. Yeah. Gold can only exist on 16 console. So, while -- and this circles back, 17 the GM percentage of Gold in my view is 18 clouded by the fact that it's tied to a 19 highly subsidized piece of hardware. Gold 20 does not exist on PC, it does not exist on 21 mobile, nor could it. Whereas Game Pass, 22 better content subscription can succeed on 23 any endpoint. 24 Q. And by "any endpoint," you mean -- 25 let me strike that. 206 1 P. Spencer - Highly Confidential 2 Any endpoint in a sense you just 3 said includes Xbox consoles, correct? 4 A. Yes. 5 Q. It includes PC, correct? 6 A. Yeah. Yes. 7 Q. It includes mobile devices like 8 phones or tablets, correct? 9 A. It does. 10 Q. It does not include PlayStation, 11 correct? 12 A. Not by our choice. Game Pass is 13 available via a web browser, and any device 14 that has a web browser could enable Game Pass 15 to be available there. Sony has chosen not 16 to make it available via their web browser. 17 Q. If Game Pass were enabled via web 18 browser on PlayStation, would Sony capture 19 any of the economics of the Game Pass 20 subscription? 21 A. I would expect they would want to 22 have a conversation with us prior to enabling 23 that, which would enable them to capture some 24 of the economics then. 25 Q. Perhaps in a conversation when 207 1 P. Spencer - Highly Confidential 2 someone accesses Game Pass through a browser, 3 none of the economics accrete to the person 4 whose hardware is running the browser, 5 correct? 6 A. It would be similar how Netflix or 7 Amazon Prime run on a console today. 8 Q. And that is none of the economics 9 from the transactions that happened in 10 Netflix or the subscription fee -- 11 A. That's right. 12 Q. -- go to the PlayStation, correct? 13 A. That's right. 14 Q. Who are the main competitors to 15 Game Pass? 16 A. PlayStation Plus, Apple Arcade, I 17 would say Google Stadia, but they've 18 obviously announced their intent to shut the 19 service down. To some extent, GeForce Now 20 from NVIDIA, Amazon Luna. 21 Q. I'm sorry, Amazon, just for the 22 court reporter, that's Amazon Luna, L-U-N-A, 23 right? 24 A. That's right. 25 Q. Anybody else? 208 1 P. Spencer - Highly Confidential 2 A. Not that comes top of mind. 3 Nintendo -- 4 (Cross-talk.) 5 A. Sorry. Nintendo does have a 6 subscription, I should've added Nintendo's -- 7 I forget the name of their subscription, but 8 they do have a subscription. 9 Q. Okay. Fair to say if you forgot 10 the name that Nintendo subscription service 11 is not a top of mind competitor to Game Pass? 12 MS. WINKINSON: Objection. 13 A. I think that's unfair. 14 Q. Okay. How many subs does Nintendo 15 subscription service have? 16 A. I -- I don't think they've 17 publically announced that. 18 Q. You rank Nintendo, whatever their 19 subscription service is, as the same level of 20 competitive threat to Game Pass as Sony, Luna 21 or Stadia before it closed? 22 A. I think we are investing more in 23 Game Pass than Nintendo is in their 24 subscription, but you have commented on the 25 strength of their intellectual property and I 209 1 P. Spencer - Highly Confidential 2 believe in their ability to drive a 3 subscription if they chose to. 4 Q. We talked about two key metrics for 5 Game Pass, one is number of subscribers, the 6 other is average revenue per user, average 7 revenue per subscriber; is that fair? 8 A. Yeah, I would really keep it on 9 subscriber because we're really trying to 10 look at what the average subscriber is paying 11 for their subscription as opposed to the 12 overall financial kind of profile of that 13 user. 14 Q. Okay. And when you talk about 15 average revenue per subscriber, that includes 16 the cost of the subscription on a monthly 17 basis, as well as post-sale monetization in 18 games that are in Game Pass or no? 19 A. It's the former. 20 Q. How do you account for revenue from 21 Game Pass subscribers who make purchases do 22 transactions that are part of post-sale 23 monetization in a game? 24 A. That revenue flows into our 25 software and service revenue, basically our 210 1 P. Spencer - Highly Confidential 2 store revenue. 3 Q. And so, when we were talking about 4 Game Pass in those two metrics, number of 5 subscribers and average revenue per 6 subscriber, the average revenue figure is 7 just a function of the subscription rate that 8 people are paying? 9 A. Yes. 10 Q. Okay. As between Microsoft game 11 cloud -- strike that. 12 As between Microsoft Game Pass and 13 the competitors that you mentioned, you have 14 a sense of who has the most subscribers? 15 A. My understanding is that 16 PlayStation Plus has over 40 million 17 subscribers, which is higher than we have. 18 Q. And what are you including in 19 PlayStation Plus when you say 40 million 20 subscribers of PlayStation SKUs? 21 A. They have three PlayStation Plus 22 SKUs. I don't -- essential- -- I don't 23 remember the three names, they're at three 24 different price points. I think the highest 25 price point is 17.99. 211 1 P. Spencer - Highly Confidential 2 Q. What was PS Now, PlayStation Now? 3 A. PlayStation Now was a streaming 4 service that Sony stopped offering as a 5 stand-alone subscription. 6 Q. Okay. Is the 40 million 7 PlayStation Plus subscribers that you just 8 referenced apples to apples with Game Pass 9 subscribers? 10 A. My belief it is, yes. 11 MR. WEINGARTEN: Let's take a look 12 at PX1288, please. 13 (Exhibit PX1288, E-mail chain, 14 Bates MSFT-2R-02824226, was 15 introduced.) 16 A. 1288. It's up. 17 Q. Okay. The top e-mail is from 18 Mr. Nadella to you and the gaming leadership 19 team and the senior leadership team, and it's 20 from December 8, 2019. 21 Do you see that? 22 A. I do. 23 Q. And he writes: 24 Really awesome milestone. 25 Congrats on all... Onward. 212 1 P. Spencer - Highly Confidential 2 And that's in response to an e-mail 3 that you sent just below. 4 Do you see that? 5 A. I do. 6 Q. And you're announcing that Game 7 Pass has just hit 10 million subscribers, 8 right? 9 A. Do you mind if I scroll down really 10 quick just to see what the mail is that I 11 forwarded? 12 Q. Yep. 13 A. Yes, I forwarded mail to the 14 senior leadership team that we had crossed 15 10 million Game Pass subscribers. 16 Q. And then you comment in your 17 e-mail: 18 Sony's PlayStation Now announced 19 one million paid subs in October after five 20 plus years. 21 Right? 22 A. Yes. 23 Q. Why are you highlighting Sony 24 PlayStation Now's total subscribers in your 25 discussion here of Game Pass subscribers? 213 1 P. Spencer - Highly Confidential 2 A. At the time that I wrote this, this 3 was the content subscription that they had. 4 Q. So, at that time in 2019, Sony's 5 content subscription service was PlayStation 6 Now; is that right? 7 A. For completeness, I should've 8 listed the PlayStation Plus subscribers as 9 well. 10 Q. But you're making the comparison 11 here for Mr. Nadella between Game Pass and 12 PlayStation Now, correct? 13 A. Three years ago, yes, not now. 14 Q. How would you describe Game Pass's 15 subscriber growth since it launched? 16 A. Steady over -- except for the last 17 six months where we've, as you mentioned, 18 flattened out, nine months. 19 Q. And the reason for the flattening 20 out over the last nine months was that you -- 21 can you describe again the reason for the 22 flattening out in the last nine months? 23 A. Obviously the customers are -- own 24 the real reason. I will say given our 25 console install base, we are starting to 214 1 P. Spencer - Highly Confidential 2 reach the -- likely the maximum number of 3 users on console that we will find. 4 Q. And what's your strategy -- let me 5 strike that. 6 How do you think Game Pass's 7 tiers that we were discussing line up against 8 the tiers for PlayStation Plus that you 9 described -- 10 A. How do I -- 11 (Cross-talk.) 12 Q. -- in terms of value proposition? 13 A. I think, I might be bias again, I 14 think our value proposition for our tiers is 15 better than PlayStation, especially given 16 their highest tier is more expensive than 17 Game Pass Ultimate and yet they still have 18 more subscribers than we do. 19 Q. Does PlayStation Plus have a more 20 limited catalogue of titles available than 21 Game Pass? 22 A. I haven't counted the number of 23 titles recently, but I believe they have more 24 titles in their subscription than we do, but 25 that that could ebb and flow over time. 215 1 P. Spencer - Highly Confidential 2 MR. WEINGARTEN: Can we go back to 3 PX1022? Something we put up before, I 4 believe. 5 Q. Do you have that already? 6 A. PX10 -- 7 Q. Let's -- 8 A. Go ahead. 9 Q. 22. Let's introduce PX1022. 10 A. Okay. Yeah, I didn't see it. 11 Q. Okay. 12 A. There it is. 13 (Exhibit PX1022, E-mail chain with 14 attachment, Bates MSFT-2R-08197569, 15 was introduced.) 16 BY MR. WEINGARTEN: 17 Q. I'll give you time as you need to 18 read it, I just want to try and go quickly 19 through the preliminaries. 20 This is an e-mail from Mr. David 21 Hampton to the gaming leadership team, dated 22 May 5, 2022. 23 Do you see that? 24 A. I do. 25 Q. And the subject is SLT Biannual 216 1 P. Spencer - Highly Confidential 2 Strategy Review 2205 notes. 3 Do you see that? 4 A. I do. 5 Q. Okay. And Mr. Hampton writes to 6 the gaming leadership team: 7 Team. 8 Rich discussion today with Satya 9 and the SLT. Thank you to Jason, Kareem, 10 Phil and Sarah for representing us. 11 In that same e-mail, he says: 12 Additionally, I've attached the 13 final versions of both the pre-read and 14 discussion materials, for your convenience. 15 Do you see that? 16 A. I do. 17 Q. So, this e-mail is relaying to the 18 GLT notes and materials about a senior 19 leadership team discussion that happened, 20 looks like, on May 5, 2022; is that right? 21 A. Yes. In addition -- there's some 22 other people on the CC line other than just 23 the GLT, but, yes, it's relaying the -- 24 Q. Okay. 25 A. -- that meeting. 217 1 P. Spencer - Highly Confidential 2 Q. Okay. I want to look at the 3 document that starts on PX1022-032. It's 4 another gaming CSA strategy review document. 5 You see that? 6 A. Not yet. I'm getting down to it. 7 32, yeah. 8 Q. And am I right, does this document 9 appear to be another gaming CSA strategy 10 presentation to the senior leadership team? 11 A. Yeah, the -- it might be exactly 12 the same, I think we would have to go and 13 compare it, but, yes. 14 Q. Okay. And if you would turn to 15 page 048, please. 16 A. Okay. 17 Q. Are you there? 18 A. I am. 19 Q. You see a third of the way down it 20 says, Industry Pureplay: Sony. 21 Do you see that? 22 A. Yes. 23 Q. So, is it fair to say this is a 24 description of Sony, as a competitor in 25 gaming, that was presented to the senior 218 1 P. Spencer - Highly Confidential 2 leadership team at Microsoft? 3 A. I would need to scroll up just to 4 see where this is in the document, make sure 5 that this -- and I can do that, I don't have 6 a problem with that. 7 Q. Take a look -- that's okay, take a 8 look at 041. 9 A. Okay. 10 Q. Says number 7 Appendix: 11 Competitive Review. 12 A. Yeah, and then we're listing each 13 competitor. 14 Q. So, if we go to 048, is it fair to 15 say this is the description for the SLT of a 16 competitive review of Sony? 17 A. I believe this is in the appendix 18 of the document is that -- am I scrolling 19 correctly? 20 Q. Right. 21 A. Yes. 22 Q. Right. 23 A. So, I would call this background 24 information in the document, yes, on Sony. 25 Q. And the background information 219 1 P. Spencer - Highly Confidential 2 comes in a section called Competitive Review, 3 right? 4 A. Yeah. Yes. 5 Q. If you look under the section about 6 Sony on page 048, if you were to look at the 7 second paragraph from the bottom, says: 8 Recently, Sony announced a 9 re-branding of its subscription services to 10 better compete with Game Pass. 11 Do you see that? 12 A. I do. 13 Q. You mentioned before that Sony had 14 done a re-brand of its game subscription 15 service, correct? 16 A. Yeah, we're commenting on the same 17 kind of motion here. 18 Q. And this document tells the senior 19 leadership team that Sony did the re-brand to 20 better compete with Game Pass, right? 21 A. Yes. 22 Q. It describes the re-brand with Plus 23 merging with PS Now. And then the next 24 sentence says: 25 PlayStation Plus has a more limited 220 1 P. Spencer - Highly Confidential 2 catalogue of titles available than Game Pass. 3 You see that? 4 A. I do. 5 Q. So, we were talking about counting 6 up titles, but as of May 2022, the senior 7 leadership team was told that PlayStation 8 Plus had a more limited catalogue of titles 9 than Game Pass, right? 10 A. In May of 2022, I'm almost certain 11 that PlayStation Plus had more games in their 12 subscription than Game Pass did. 13 Q. So, this is just wrong? 14 A. What I -- how I would say it is the 15 word "limited" I think is a qualifier for the 16 next sentence that Sony has decided to not 17 put their first-party games in when they are 18 launched. So, limited not in a quantity, but 19 in the kind of content they're making 20 available. 21 Q. I see. So, relative to Game Pass, 22 PlayStation Plus has a more limited 23 catalogue, if you take the word "limited" to 24 mean not the number of times, but quality of 25 titles? 221 1 P. Spencer - Highly Confidential 2 A. Probably recency of titles might be 3 the term I would use. Quality kind of 4 reflects on maybe review score averages or 5 something along those lines. 6 Q. I see. So, a more robust 7 catalogue -- sorry, go ahead. 8 A. I was going to say Sony has made 9 the decision to date for most of their games, 10 not all, to not ship them into PlayStation 11 Plus when they launch. 12 Q. Okay. So, Game Pass has a strategy 13 of day and date launch of first-party content 14 into Game Pass, right? 15 A. Yes, we do. 16 Q. Including exclusive content day and 17 date launch into Game Pass, right? 18 A. Our games ship on PC and console 19 and cloud, so maybe I -- the exclusive term, 20 I would just say the games that Xbox Game 21 Studios and ZeniMax ship, we launch into Game 22 Pass when we're allowed to on their launch 23 date, right. 24 Q. And by doing day and date launch, 25 that means that a game or a title will launch 222 1 P. Spencer - Highly Confidential 2 in Game Pass on the same day it launches 3 elsewhere, right, whether that's on or off 4 Xbox ecosystem, right? 5 A. Yeah, our customers will have 6 the choice to buy the game or to be a 7 subscribe- -- to subscribe to play the games. 8 Q. That includes titles that are 9 exclusive to Xbox and titles that are not 10 exclusive to Xbox, right? 11 A. I'm not trying to argue, I just 12 want to -- what are the -- we don't -- when 13 you say "exclusive to Xbox," do you mean 14 console? 15 Q. Xbox ecosystem. 16 A. It might be easier, and I know it 17 sounds obtuse, it might be easier if you use 18 some examples of the games in these two 19 categories 'cause I want to make sure I'm 20 answering accurately. 21 Q. Sure. So, let me do it this way: 22 Can you name a Microsoft first-party studio 23 game that launched exclusively on Xbox 24 console this year? 25 A. No, 'cause all of them shipped on 223 1 P. Spencer - Highly Confidential 2 PC. 3 Q. Can you name a Microsoft 4 first-party game that shipped on Xbox console 5 or PC, but not PlayStation? 6 A. Yes, yeah. 7 Q. How many of those were there? 8 A. In calendar year 2022, I think 9 we're at four. 10 Q. And on the day those launched, did 11 they also launch on the same day in Xbox Game 12 Pass? 13 A. They did. 14 Q. Okay. And is that Microsoft's plan 15 for Game Pass that it offers day and date 16 launch of games whether they're exclusive to 17 Xbox and PC or not? 18 A. I'm just going to say it the way I 19 feel our strategy is, I don't know if it's 20 going to matter what the language -- again, 21 I'm not trying to argument the games that 22 Xbox Game Studios and ZeniMax launch will be 23 available at retail and in the subscription 24 on their launch day. 25 I don't know if that's answering 224 1 P. Spencer - Highly Confidential 2 your question, but that's our policy. 3 Q. Okay. And Sony, with PlayStation 4 Plus, does not have the same policy, correct? 5 A. Yes, they have made the decision to 6 not do that. 7 Q. When you think about Xbox Game Pass 8 growth, is it fair to say that content on 9 Game Pass drives hours players spend on Game 10 Pass which drives more paying subscribers on 11 Game Pass? Is that the right way of thinking 12 about the relationship between content hours 13 and subscriptions? 14 A. We strive to have a regular cadence 15 of new games that are available in both our 16 retail stores and to our subscribers to both 17 drive new subscribers and retention of the 18 existing subscribers that we have as it 19 relates to Game Pass. 20 Q. Would you agree that subscriber 21 scale is the imperative for a successful 22 subscription service in gaming? 23 A. I do. 24 Q. Would you agree that subscriber 25 sale is essential in building a subscription 225 1 P. Spencer - Highly Confidential 2 service in gaming? 3 A. Subscriber scale and the revenue 4 per subscriber, assuming both are healthy, 5 are keys to our subscription growth. 6 Q. Would you agree that there is a 7 virtuous relationship between content and 8 subscriber scale? 9 A. There is a correlation between the 10 games in the subscription and the number of 11 subscribers, yes. 12 Q. And it's a positive correlation, 13 correct? 14 A. It is a positive correlation. 15 Q. So, the more content, the more 16 subscriber scale, correct? 17 A. To be more accurate, I would say 18 the more different content in the 19 subscription, the more the subscription 20 scales. Duplicative content, the correlation 21 is not -- it's more flat. 22 Q. So, is it fair to say that 23 differentiated content then is the primary 24 driver of subscriber scale? I think that's 25 what you just said, I just want to be clear. 226 1 P. Spencer - Highly Confidential 2 A. No -- well, I didn't mean -- what 3 we see in Game Pass growing is that having 4 diverse content for different kinds of 5 players is a key to us growing the 6 subscription. I don't know if diverse and 7 differentiated are the same in that 8 definition. 9 Q. Okay. 10 MR. WEINGARTEN: Let's look at 11 PX1050 please, 1050, introduce that. 12 (Exhibit PX1050, E-mail chain with 13 attachment, Bates MSFT-2R-04769774, 14 was introduced.) 15 A. Okay. I have it up. 16 Q. Okay, great. 17 If you look at the first page, it's 18 an e-mail chain, first e-mail that starts off 19 the chain is from Tim Stuart on July 27, 20 2020. 21 Do you see that? 22 A. July 27, 2020 from Tim Stuart, I 23 do. 24 Q. Okay. He sends an e-mail to Amy 25 Hood, to you, to Sarah Bond and some others, 227 1 P. Spencer - Highly Confidential 2 right? 3 A. Yes. 4 Q. Says: 5 Tomorrow we will have time with you 6 to discuss the Project Atom (ZeniMax 7 acquisition). 8 Was Project Atom the code name for 9 Microsoft's acquisition of ZeniMax? 10 A. Yes. 11 Q. He says: 12 We will spend our time in the Atom 13 financial materials deck, but I've also 14 attached our draft board materials for 15 reference as well. 16 Do you see that? 17 A. Yes. 18 Q. Then he writes: 19 For our acquisition thesis, we will 20 land the following financial and strategic 21 elements: 22 Content catalogue growth drives net 23 new hours within Game Pass customer 24 engagement. 25 See that? 228 1 P. Spencer - Highly Confidential 2 A. Yes. 3 Q. Okay. Do you agree with that? 4 A. Yes. 5 Q. Okay. Next one: 6 Hours and subscribers are highly 7 correlated and therefore growth in hours 8 equals growth in paying subscribers. 9 Do you agree? 10 A. I do. 11 Q. Then he writes about ZeniMax, it's 12 critical to growing a strong overall 13 catalogue and driving more hours and 14 converting into paid subscriber growth? 15 Do you agree with that? 16 A. Yes. At the time, ZeniMax was 17 critical to growing our catalogue and driving 18 more hours. 19 Q. Is Activision critical now to 20 growing the catalogue and driving more hours? 21 A. For Game Pass? 22 Q. Yes. 23 A. No. Activision doesn't ship enough 24 new games, new non free-to-play games -- 25 Can you ask the question again? I 229 1 P. Spencer - Highly Confidential 2 want to make sure I'm answering that clearly. 3 Q. If we substitute the word 4 "Activision" for "ZeniMax" in that last 5 bullet point; is that correct? 6 A. No. We're not acquiring Activision 7 in order to grow Game Pass. 8 Q. Okay. Why are you acquiring 9 Activision? 10 A. The primary strategic thesis behind 11 acquiring Activision is to grow our mobile 12 content creation capability. 13 Q. And are you familiar with the 14 synergies that have been calculated to accrue 15 from Microsoft's acquisition of Activision? 16 A. I understand the valuation model 17 and the role of the existing business, the 18 Game Pass growth and mobile store, those 19 synergies that you're talking about? 20 Q. Yes. 21 A. Yeah. 22 Q. When you say "mobile store," I've 23 seen it referred to as universal store. 24 Does that mean mobile store? 25 A. Yes, our strategic opportunities to 230 1 P. Spencer - Highly Confidential 2 create a digital mobile store -- a digital 3 store that's available on the largest gaming 4 platform, which is mobile. 5 Q. And are you familiar with the size 6 of the estimated synergies that are to accrue 7 from X pass [sic] subscriber growth and 8 universal store as a result of the Activision 9 deal? 10 A. Yeah, in building out the financial 11 model for an acquisition, this acquisition, 12 we're relying on the existing businesses that 13 are at scale or have some scale to them to 14 justify the $70 billion acquisition costs, 15 primary to being -- running the existing 16 business as it is as a stand-alone business, 17 including sales across all platforms where 18 those games are sold and the uplift in Game 19 Pass subscribers. Those are the two largest 20 financial drivers of the model. 21 Q. So, in terms of financial drivers, 22 those two are the largest. And is there a -- 23 other than universal store, is there a mobile 24 synergy that's broken out when Microsoft had 25 disclosed potential synergies from the deal? 231 1 P. Spencer - Highly Confidential 2 A. There's a fourth -- we can bring it 3 out, but it's advertising in our growth in 4 that part of the business, which will 5 primarily exist on mobile. So, the universal 6 store, which I will call mobile store and 7 advertising, are two that are dependent upon 8 our progress on mobile and will help us grow 9 on mobile. 10 Q. Do you know the relative size of 11 the Game Pass universal store and advertising 12 synergies? 13 A. Yeah. I think they're in line with 14 the high degree of risk that those models 15 will succeed, the universal store and 16 advertising from a financial driver in the 17 time frame of the model are significantly 18 smaller. The largest component is running 19 the existing business, including shipping all 20 of the games on existing platforms and the 21 second largest is the uplift in Game Pass. 22 Q. And the ad business that you talked 23 about -- the ad synergy, that's like two and 24 a half billion; is that right? 25 A. That's right. We don't have -- our 232 1 P. Spencer - Highly Confidential 2 advertising business today is roughly 3 $100 million. So, from a growth standpoint, 4 it's significant compared to where we are 5 today, but in the absolute it's a smaller 6 number relative to the others. 7 Q. So, in terms of justifying spending 8 70 billion on Activision, the two biggest 9 pieces are the existing business and Game 10 Pass subscriber growth, right? 11 A. In terms of justifying 70 billion, 12 the largest consideration is running the 13 existing business, including shipping all of 14 the games on the existing platforms. And the 15 second largest is the uplift in Game Pass 16 given the fact that we understand how to grow 17 Game Pass and we have existing subscribers. 18 Q. Despite -- do you know the 19 magnitude of the Game Pass subscription 20 synergy, the $25 billion? 21 A. We could bring it up, but I believe 22 that's about right. I believe the running 23 the business is 40, I believe the universal 24 store and advertising from a standpoint of 25 presenting to the board, the financial 233 1 P. Spencer - Highly Confidential 2 certainty of the return are significantly 3 smaller than the first two, which are more 4 proven lines of business. 5 Q. Right. And so, the $25 billion in 6 Game Pass subscriber-related synergies from 7 Activision, bearing that in mind, you don't 8 agree that Activision is critical to growing 9 a strong overall catalogue and driving more 10 hours converting into paid subscriber growth 11 on Game Pass? 12 A. If growth with Game Pass 13 subscribers was the most important 14 consideration, we would not be buying 15 Activision Blizzard King. 16 Q. Going back to 1050, PX1050, the top 17 e-mail -- strike it. 18 The next e-mail up after Tim Stuart 19 is Amy Hood. She sends the material to Satya 20 Nadella with a CC to you and some others, and 21 then you forward the e-mails to Ms. Bond and 22 Mr. Stuart. 23 Do you see that? 24 A. I do. 25 Q. And if you turn to page PX1050-031. 234 1 P. Spencer - Highly Confidential 2 A. Sorry. Can you read the page 3 number again? 4 Q. Yep, 031. 5 A. 31. 6 Q. Is the document that you -- yep. 7 And you can look at 001 before you go 'cause 8 I'm gonna ask you that same kind of question. 9 031 is the gaming CSA Strategic 10 Framing memo ZeniMax v12. 11 Take a look at what you need to 12 look at to confirm that's right, please. 13 A. Strategy -- 14 Q. So, this memo that starts at 031 15 was sent to Ms. Hood who forwarded it to 16 Mr. Nadella, right? 17 A. Amy's mail doesn't list any 18 attachments in the header. 19 Am I seeing something diff- -- 20 Q. No. Do you think you forwarded 21 this e-mail from Ms. Hood and added these 22 things or you don't remember? 23 A. I don't remember. I'm just reading 24 the Outlook Pro header, which shows that mail 25 forwarded to Sarah and Tim has an attachment, 235 1 P. Spencer - Highly Confidential 2 and I'm looking at Amy's mail to Satya does 3 not include an attachment, just in the 4 header -- I'm literally reading the headers 5 here. 6 Q. No, I understand. 7 But in your common usage of e-mail, 8 you send things like this, when you forward, 9 usually forward with the attachments, if 10 there are any? 11 Let me ask this this way, sir: Do 12 you have any reason to doubt that the 13 document that starts at page 031 is the 14 gaming CSA Strategic Framing Memo ZeniMax 15 v12? 16 A. No. 17 Q. Do you have any reason to doubt 18 that that document was part of the strategic 19 discussion among you and Mr. Nadella and 20 Ms. Hood about the ZeniMax acquisition? 21 A. I would doubt that with Amy and 22 Satya we would've gone through this document, 23 the document that's starting on 031, we 24 would've spent all of our time looking at the 25 ZeniMax material. 236 1 P. Spencer - Highly Confidential 2 Q. Right. Do you think -- was it your 3 common -- strike that. 4 Are you saying that document was 5 not sent to Ms. Hood or Mr. Nadella, or you 6 don't know? 7 A. I don't know. 8 Q. Okay. Let's take a look at 9 page 033. It says -- at the bottom there's a 10 heading and it says: 11 B: Differentiated content is the 12 primary driver of subscriber scale. 13 I asked you this whole section, 14 starting with me asking if you agreed with 15 that sentiment. 16 Do you agree with that sentiment? 17 A. As we've learned more about running 18 the subscription and I think that mail from 19 Tim that described our valuation thesis for 20 ZeniMax, the primary driver of subscriber 21 scale that we are seeing is hours played. If 22 we had to pick a metric that is most 23 similarly correlates to subscriber growth. 24 Q. And you agreed that content 25 catalogue growth drive net new hours in Game 237 1 P. Spencer - Highly Confidential 2 Pass, right? 3 A. This differentiated content from 4 the content that's currently in the 5 subscription can lead to more hours of 6 growth. So, this is -- the word 7 "differentiated" is a reflection on the 8 content that is currently in the subscription 9 as a way of driving hours of growth is what 10 we learned. 11 Q. Getting differentiated content, 12 i.e., new content, is the primary driver of 13 subscriber scale. 14 Is that what you're saying? 15 A. Net new hours are the primary 16 driver of subscriber scale, so there's one 17 level of indirection, but, yes. 18 Q. And if you look at page 035 of the 19 same document, it's the same State of the 20 Union that we looked at earlier today. You 21 see number 1 under State of the Union where 22 it says, need for differentiated content, and 23 it defines differentiated content? 24 A. I do. 25 Q. So, differentiated content means 238 1 P. Spencer - Highly Confidential 2 investing in content that is, one, exclusive 3 to the service. You see that? 4 A. I do. 5 Q. Two, blockbuster in scale. 6 See that? 7 A. I do. 8 Q. And three, released on a day and 9 date basis to maximize the value of the 10 content to subscribers. 11 Do you see that? 12 A. I do see that. 13 Q. Okay. Same language that we looked 14 at earlier in the day, as you said before, 15 sometimes language gets repurposed over and 16 over again, right, if it's part of the 17 strategy? 18 A. Yes. 19 MR. WEINGARTEN: Let's look at 20 PX1157, please. 21 (Exhibit PX1157, E-mail chain, 22 Bates MSFT-2R-06665108, was 23 introduced.) 24 BY MR. WEINGARTEN: 25 Q. Let me know when you have it. 239 1 P. Spencer - Highly Confidential 2 A. Yep. 3 Q. Thank you. 4 I think this document goes to 5 the steps that you were talking about 6 earlier, content, hours, engagement, 7 subscribers. Take a look, let me know when 8 you're ready to discuss it, please. 9 A. (Document review.) 10 Okay. 11 Q. This is a series of e-mails between 12 several people, but towards the end, it's you 13 and Mr. Stuart going back and forth, right? 14 A. Yes. 15 Q. And the final e-mail in this chain 16 is you writing to Mr. Stuart on July 30, 17 2020: 18 Can we chat for a second? 19 Do you see that? 20 A. Yes. 21 Q. Do you remember this chat that you 22 had with Mr. Stuart? 23 A. I do not. 24 Q. Mr. Stuart writes at the bottom of 25 page 001: 240 1 P. Spencer - Highly Confidential 2 I would present it as a step 3 function: 4 1. The quality and size of the 5 catalogue is critical and highly correlated 6 to subscriber growth. You can see that in 7 the catalogue chart, which shows day and 8 date, high quality, first-party games going 9 into Game Pass and driving new subs as a 10 result. 11 Do you see that? 12 A. I do. 13 Q. You understand what he means when 14 he uses the words quality of the catalogue, 15 where he talks about high quality catalogue 16 in that sentence? 17 A. I don't have a specific definition 18 of how he's using high quality. 19 Q. What do you understand that to mean 20 when you read it? 21 A. I would assume it means good games. 22 Q. Can it be anything more specific 23 than just good games? 24 A. I can't. I mean -- no, not really. 25 I mean, games that gamers want to play. 241 1 P. Spencer - Highly Confidential 2 Q. Games that people have an affinity 3 for playing? 4 A. Now, I'll kind of go -- the -- 5 there are games that gamers think they're 6 gonna want to play and then games that people 7 actually play. As he's using it here, this 8 is the result of a game shipping and people 9 actually playing it, which might be different 10 than kind of an expectation of quality that a 11 game might have prior to launch. 12 Q. Do you think that AAA games are 13 quality games? 14 A. Some AAA games are quality and some 15 AAA games are not quality games. 16 Q. And given that this is a -- exists 17 in a marketplace where people play for 18 games -- strike that. 19 In your business, is the amount of 20 revenue that a game generates a good 21 indicator of whether people want to play that 22 game? 23 A. Yes. 24 Q. Would you agree that engagement of 25 subscribers is the oxygen for the Game Pass 242 1 P. Spencer - Highly Confidential 2 service and business growth? 3 A. Yes. 4 Q. And engagement comes through 5 content? 6 A. Engagement is specific to the 7 number of hours played. 8 Q. And content influences hours 9 played? 10 A. Content does influence hours 11 played. 12 Q. Okay. And in fact, as Microsoft 13 Game Pass drives engagement, the content 14 becomes more valuable. 15 Would you agree with that? 16 A. As subscribers play games, the 17 value and awareness of those games go up, 18 yes. 19 Q. And would you agree that in your 20 view, Microsoft is actually the better owner 21 for any game intellectual property than any 22 other publisher on the planet as Microsoft 23 can drive engagement through a retail and 24 subscription which leads to higher revenue? 25 You agree? 243 1 P. Spencer - Highly Confidential 2 A. Not today. That was true at one 3 point. 4 Q. When was that true? 5 A. Before Sony created a subscription 6 that was twice the size of ours. 7 Q. How did Sony do that? 8 A. By leveraging the size of their 9 console install base. 10 Q. And how did they get the number of 11 subs to be so big so fast? 12 A. They have a much larger market to 13 attach subscriptions to. Plus, they had a 14 model with Game Pass to look at given that we 15 had been in the market for a few years. 16 MR. WEINGARTEN: Let's look at 17 PX1062. 18 MS. WINKINSON: James, after this, 19 can we take a break? 20 MR. WEINGARTEN: Yeah, yeah. 21 Let's look at 1062. 22 (Exhibit PX1062, E-mail chain, 23 Bates MSFT-2R-01742378, was 24 introduced.) 25 A. I have the mail up. 244 1 P. Spencer - Highly Confidential 2 Q. Take a look -- look at what you 3 need to to understand the context of the 4 document. 5 The statement I was reading to you 6 before comes from page 003, an e-mail that 7 you sent to Mr. Jean-Emile Elien. Let me 8 know when you're ready to talk about the 9 document, please. 10 A. (Document review.) 11 I've read it. 12 Q. Okay. Let's go to the e-mail that 13 starts off the chain, it's on page 003. 14 Mr. Elien writes to you on March 17, 2021. 15 You see that? 16 A. I do. 17 Q. And Elien is spelled E-L-I-E-N. 18 And he starts asking you a question about 19 Google and Amazon news relative to their 20 attempts at building gaming studios and asks 21 you: 22 Does Game Pass change how you think 23 about the value of a studio? 24 And your response, which is the 25 e-mail above, also on March 17, 2021 is: 245 1 P. Spencer - Highly Confidential 2 Totally think differently today. 3 Do you see that? 4 A. I do. 5 Q. And as of March 17, 2021, you said: 6 We are actually the better owner 7 for any game IP than any other publisher on 8 the planet right now as we can drive 9 engagement through retail and subscription 10 which leads to higher revenue. 11 Do you see that? 12 A. I do. 13 Q. So, you thought that was true as of 14 March 17, 2021, right? 15 A. Yes. 16 Q. You don't think that's true today? 17 A. I do not. 18 Q. Did you think it was true on 19 January 18, 2022? 20 A. I don't remember. 21 Q. And you don't think it's true today 22 because PlayStation has more subscribers for 23 PlayStation Plus than Microsoft has 24 subscribers in Game Pass; is that right? 25 A. They have more -- Sony has more all 246 1 P. Spencer - Highly Confidential 2 up engagement on PlayStation than Xbox does, 3 and they have more subscribers in PlayStation 4 Plus than we do in Game Pass. 5 So, any metric I would use to say 6 that we are better, I'd struggle to not apply 7 Sony's same ecosystem to that math and see 8 them come out with a better outcome. 9 Q. What about day and date release of 10 exclusive titles? That's a policy that Sony 11 does not have, but Game Pass does, correct? 12 A. Sony has released some games day 13 and date in their subscription so they have 14 an approach of -- on a case-by-case basis and 15 I -- I don't know what evaluation they're 16 using to make the decision on when a game 17 like Stray, which is -- I think it launched 18 in August, would release on -- into the 19 service day and date with its retail 20 availability. I assume they're doing some 21 calculation on value to them. 22 Q. If Sony is doing day and date 23 release into a subscription service on a 24 case-by-case, that's a contrast with Game 25 Pass's policy of doing day and date release 247 1 P. Spencer - Highly Confidential 2 for all games on to subscription, correct? 3 A. Yeah, that's a self-inflicted 4 difference on their part, yes. 5 Q. And you stand by the thesis that 6 doing day and date release of content the way 7 Microsoft Game Pass does part of creating 8 differentiated content for Game Pass? 9 A. I stand by our decision, if that's 10 what you're asking, to ship our games day and 11 date into Game Pass to grow subscribers, yes. 12 Q. And that decision is based on the 13 fact that doing that will -- it's your belief 14 it will ultimately lead to subscriber growth, 15 correct? 16 A. Yes. 17 Q. And the next paragraph you wrote to 18 Mr. Elien: 19 I want to keep that lead and 20 actually extend it so our investment in 21 studios, as you've seen, has increased. 22 And so, the investment in studios 23 there means having more content, means 24 improving engagement, correct? 25 A. The investment studios here is to 248 1 P. Spencer - Highly Confidential 2 have more creative capacity in our 3 organization, yeah. 4 Q. To create -- to drive more content 5 to in turn drives more engagement which in 6 turn drives more subscriptions for Game Pass, 7 right? 8 A. Not just Game Pass. When you think 9 about making Xbox a more delightful platform 10 on any screens, as I've stated, subscription 11 will be one of the business models, but it -- 12 Game Pass is not the only way we will attract 13 customers on every screen. So, I would not 14 equate our growth in studios to be solely 15 about growth of Game Pass. 16 Q. It's broader than Game Pass, it's 17 about growth across screens; is that fair? 18 A. Yeah. Yes. 19 Q. Okay. And then you write: 20 I want to make it clear to Google, 21 Amazon, et cetera, that you are not, all 22 capital N-O-T, going to catch us in gaming. 23 Do you see that? 24 A. I do see that. 25 Q. And by "catch us in gaming," when 249 1 P. Spencer - Highly Confidential 2 you're referring to Google and Amazon, you 3 mean building a subscription service for 4 games? 5 A. I would just say all up relevance 6 in gaming. 7 Q. You continue: 8 One of reasons cited internally at 9 Google for them divesting of the first-party 10 with our ZeniMax acquisition. 11 What are you referring to when you 12 say Google divesting first-party? 13 A. Google Stadia made a decision to 14 close down their first-party studio 15 organization and sell off the studios or 16 close the studios they'd acquired. 17 Q. And this was in March of 2020 -- 18 2021 that you're writing this, subsequent to 19 this, is Google closing Stadia altogether? 20 A. They have announced that they will 21 be closing Stadia altogether. 22 Q. Okay. And in this, you're saying 23 that your understanding is that internally at 24 Google, one of the reasons they got out of 25 first-party content creation was the ZeniMax 250 1 P. Spencer - Highly Confidential 2 acquisition? 3 A. That is a rumor that I heard. 4 Q. Okay. What -- how does that 5 follow, how does the ZeniMax acquisition 6 result in a reason for Google to divest from 7 first-party content production? 8 A. From the time I've taken this job, 9 there's been some who might question 10 Microsoft's commitment to the gaming category 11 and whether we were going to stay invested in 12 gaming as a line of business. My view is, 13 moves like ZeniMax showed that the board and 14 Satya were committed to us continuing to 15 invest in the gaming business. 16 Q. And can you connect that to the 17 information you had about Google divesting 18 from first-party because of the ZeniMax 19 acquisition? 20 A. Google has some strong strengths in 21 the gaming business when you think about 22 Android, Google Play and YouTube. They would 23 benefit, in my view, if Microsoft were to 24 exit the gaming business and their job would 25 become easier as would others. 251 1 P. Spencer - Highly Confidential 2 So, when Microsoft makes a decision 3 that we are gonna continue to invest in the 4 gaming business, I do think our competitors 5 look at that as a sign that we're committed 6 to continuing to make progress in gaming. 7 Q. And so, Microsoft's demonstrated 8 commitment to gaming through the ZeniMax 9 acquisition is one reason that Google 10 divested from first-party content -- 11 A. I don't -- 12 Q. -- in the subscription service? 13 A. I don't know that. 14 Q. But that's one of the reasons cited 15 internally at Google that you heard? 16 A. That was a rumor that I had heard. 17 Q. And a rumor that you cited or 18 passed on to Mr. Elien, right? 19 A. Jean-Emile is a developer architect 20 on our Xbox Live business, he's a programmer. 21 Q. And then you write: 22 I just want to put us out of reach. 23 What does that mean? 24 A. I want to make it clear to 25 companies that Microsoft will continue to 252 1 P. Spencer - Highly Confidential 2 invest in the gaming business and reach our 3 full potential. 4 Q. And why does Microsoft continue to 5 invest, put it out of reach, quote/unquote? 6 A. I don't think I said it did here. 7 I just want to make it -- my statement here 8 was I want to make it clear that we're gonna 9 continue to invest in the strengths that we 10 have as a gaming business in Xbox. 11 Q. Well, Google's a pretty large 12 company too, right? 13 A. Google is a pretty large company. 14 Q. They have a lot of assets, lot of 15 revenues, a lot of cash, correct? 16 A. They make more revenue in gaming 17 than we do. 18 Q. Okay. So, how -- again, how does 19 acquiring ZeniMax demonstrate to Google that 20 Microsoft would be on the path to being out 21 of reach for Google gaming? 22 A. It's been a constant question since 23 I took this job from press and analysts of 24 why Microsoft is in the gaming business and 25 are we committed to this business. So, I 253 1 P. Spencer - Highly Confidential 2 look at investments in our gaming business as 3 a sign to anyone who might be looking at -- 4 for weakness or lack of commitment in our 5 gaming business that the company is willing 6 to invest in the gaming category to achieve 7 success. 8 Q. And I guess the problem I'm 9 struggling with the ZeniMax deal was a -- 10 THE COURT REPORTER: I'm sorry. 11 You're breaking up. 12 Q. The ZeniMax deal was a seven and a 13 half billion dollar deal, right? 14 A. Yes. 15 Q. And I guess I'm struggling with -- 16 can we agree that that dollar value of deal 17 size is not outside of Google's capabilities 18 for doing an acquisition, correct? 19 A. It is not. 20 Q. Okay. So, I guess I'm still 21 confused about how Microsoft demonstrating 22 commitment to gaming lead to a company the 23 size of Google exiting the gaming -- the 24 first-party content business? 25 MS. WINKINSON: Objection. Asked 254 1 P. Spencer - Highly Confidential 2 and answered several times. 3 And as soon as you're ready, 4 Mr. Weingarten, we'd like to take a 5 break. 6 MR. WEINGARTEN: Yep, we're just 7 going to finish up this little line, 8 please. 9 A. You put quotes around commitment. 10 Should I think about commitment being 11 anything other than commitment? 12 Q. No, I just want to make sure I'm 13 using your word. 14 Go ahead. 15 A. ZeniMax -- ZeniMax was the largest 16 gaming acquisition for the Xbox business at 17 that time, and it had been a number of years 18 since our previous larger acquisition which 19 would've been Minecraft. So, my view was a 20 ZeniMax acquisition at this time showed that 21 Microsoft and the board at Microsoft remained 22 committed to our success in gaming. 23 Q. Just a couple more and I promise 24 we'll take a break. 25 Given that ZeniMax was a seven and 255 1 P. Spencer - Highly Confidential 2 a half billion dollar acquisition and the 3 yield value for the Activision acquisition is 4 70 billion, nearly ten times as much, what 5 effect do you think that this demonstration 6 of Microsoft's commitment in the Activision 7 deal will have in the marketplace with 8 Microsoft's competitors? 9 A. From our capability to ship a 10 differentiated set of games on a regular 11 cadence, the ZeniMax acquisition is actually 12 more critical to us than Activision. I think 13 they provide different capabilities in the 14 gaming business. 15 For Google, specifically, they had 16 positioned Stadia as a replacement for 17 consoles and gaming PCs. And our acquisition 18 of ZeniMax was an investment that we made 19 specifically for PC strength and console 20 strength, which my view would've shown that 21 we remain committed to console and PC in the 22 face of Stadia being marketed as a 23 replacement to those platforms. 24 Q. Why do you think Stadia -- why do 25 you think Google announced that it would be 256 1 P. Spencer - Highly Confidential 2 shutting down Stadia in the last month or 3 whenever it was? 4 MS. WINKINSON: I'm going to 5 object to the speculation of what 6 others think or others' motivation. 7 You can answer. 8 Q. You can answer. 9 A. When we acquired -- 10 (Cross-talk.) 11 Q. Let me strike that. 12 Do you have any hypothesis or view 13 as to why Google shut down Stadia? 14 A. When we acquired ZeniMax, we have 15 games that are on Stadia that we've continued 16 to support, post-acquisition, namely, Doom 17 Eternal and Elder Scrolls Online, and we 18 continued to support them in the 18 months 19 post the close of the acquisition. And just 20 given the usage and monetization of our games 21 that are on Stadia, I would -- I would say 22 that they just failed to hit a market demand 23 with the product that they were offering just 24 given the number of users that we see. But 25 we continue to support our games on Stadia. 257 1 P. Spencer - Highly Confidential 2 Q. Product offering includes content; 3 is that fair? 4 A. My view is that content wasn't 5 their biggest obstacle. Their biggest 6 obstacle was their launch, at their launch 7 they positioned this as a replacement to PC 8 and console that gamers of PC and console 9 actually like their devices, so positioning 10 something as a replacement to a device that a 11 customer likes is not a great approach, and 12 then the games -- their primary business 13 model was to sell you games that you could 14 then stream to a device. 15 They had a good collection of 16 games, including our games at launch. Having 17 games available for $60 purchase as kind of 18 their primary way to get people in early on 19 in the launch of Stadia, I think met with 20 gamer friction. It's just my opinion. 21 MR. WEINGARTEN: Let's take a 22 break. Thank you for bearing with me. 23 We'll go off the record. 24 THE COURT REPORTER: Off the 25 record. 258 1 P. Spencer - Highly Confidential 2 (Whereupon, a brief recess was 3 taken.) 4 THE COURT REPORTER: We're back on 5 the record. 6 BY MR. WEINGARTEN: 7 Q. Let's go back to PX1062, 1062 which 8 is the document we were looking at right 9 before the break. 10 Do you have that, sir? 11 A. I do. 12 Q. So, in response to your e-mail, you 13 look at the bottom -- that we were just 14 talking about, if you look at the bottom of 15 page 002, Mr. Elien writes to you, he 16 responds on March 18, 2021, the e-mail we 17 were just discussing, and he writes: 18 The moat is clear. I've heard as 19 much from Google friends about the chill the 20 ZeniMax acquisition had on their plans. 21 So, I guess my question to you is, 22 do you have any understanding of what moat 23 means there? 24 A. I can't specifically say I know 25 what Jean-Emile meant when he typed "moat" 259 1 P. Spencer - Highly Confidential 2 there. 3 Q. What do you think it means, though? 4 Let me ask you this: Do you remember what 5 you thought it meant when you read it at the 6 time? 7 A. Not specifically. 8 Q. Okay. And then what do you think 9 it means reading those words here today? 10 A. When we think about competitors in 11 our gaming space, we often think about the 12 relative strengths that different companies 13 have. In the case of Google, they obviously 14 have Android and YouTube and billions of 15 users, and we don't have that. 16 Our differentiation in the market 17 is the fact that we have an Xbox console and 18 gamers who love to play on that console. So, 19 relative to the different gaming competitors 20 out there, for us, the content that we know 21 how to build and the customers that we have 22 on our console would be our differentiators 23 in the market relative to a Google or an 24 Amazon. 25 Q. You can put that game -- that 260 1 P. Spencer - Highly Confidential 2 document aside. Thank you. 3 When I ask about Game Pass, does 4 Game Pass also include within it other 5 subscription services? So, for example, when 6 I subscribe -- if I were to subscribe to Game 7 Pass, does that give me access within Game 8 Pass to also subscribe to another kind of 9 subscription service, for example, something 10 from EA or Epic or something like that? 11 A. If you subscribe to Game Pass 12 Ultimate today, you get a subscription to EA 13 Access, I believe is the name of their 14 subscription, as part of your Ultimate 15 subscription. 16 Q. So, are there any other 17 subscription services that are included 18 inside Game Pass like the one from EA that 19 you mentioned? 20 A. We have done cross-promotion on 21 subscriptions with subscriptions like a 22 Spotify or a Disney Plus or a Paramount, 23 they're usually time based, but there have 24 been instances where you get a promotion, 25 either get Game Pass for some amount of time 261 1 P. Spencer - Highly Confidential 2 if you subscribe to them or vice versa. But 3 nothing in perpetuity. 4 Q. And when you talk about Disney or 5 Spotify, do you mean -- subscribe to Game 6 Pass and you'll also get a subscription to go 7 to Disney, and maybe you're going to Disney 8 on your Roku or through your TV or do you 9 mean Disney Plus is inside Game Pass? 10 A. No, it would be if you are a Game 11 Pass subscriber or -- it depends on the 12 promotion or signed up for Game Pass now, 13 maybe you get two months of access, as I'm 14 just using it as an example, to Disney Plus. 15 You could access on any device, Xbox has 16 Disney Plus app, but it wouldn't be specific 17 to access on any specific device. It would 18 just be a cross-promotion between two 19 subscriptions. 20 So, just for completeness, when you 21 ask me about are there other subscriptions 22 that can have links to Game Pass, that's how 23 the others have occurred. 24 Q. Okay. And I want to understand, is 25 the EA subscription relationship different 262 1 P. Spencer - Highly Confidential 2 than just cross-promotion? 3 A. Yes. 4 Q. Is the EA subscription service 5 literally within Game Pass? 6 A. Technically, it's a little more 7 complicated. You -- but, yes, at the highest 8 level. For example, on PC, you end up 9 installing the EA Access app when you are a 10 Game Pass subscriber, Game Pass Ultimate 11 subscriber on PC. So, it feels probably less 12 like it's embedded, but the idea is I'm 13 paying for ultimate at 14.99 a month in the 14 US and I have access to the EA Access 15 subscription during that time. 16 Q. And are there other subscriptions 17 that, I'll say the word, within Game Pass in 18 the same way that EA subscription is within 19 Game Pass, not just a co-promote, but Game 20 Pass as a way to get into EA? 21 A. Not that don't come from Microsoft. 22 We have some partner discussions with Ubisoft 23 and Riot for cross-promotion and/or inclusion 24 of certain content deals or content-based 25 subscriptions or business models in Game 263 1 P. Spencer - Highly Confidential 2 Pass, but today EA Access is really the 3 answer. 4 Q. And is it fair to say that -- 5 MR. WEINGARTEN: Can you guys hear 6 me all right? I'm getting a little 7 feedback as the cleaning crew cleans. 8 A. I hear you okay. 9 MS. WINKINSON: We hear the 10 cleaning crew. 11 MR. WEINGARTEN: Well, if it 12 starts interfering with your hearing, 13 just let me know. 14 Q. Is it fair to say that at least 15 some developers and publishers are 16 negotiating economics to be included in -- in 17 Game Pass, that is that Game Pass offers them 18 some value and they're negotiating economics 19 to get included into Game Pass? 20 A. For subscriptions or on a per title 21 basis? 22 Q. Either way. 23 A. Yeah, we always have discussions 24 and negotiations on bringing new content to 25 Game Pass. 264 1 P. Spencer - Highly Confidential 2 Q. Okay. And when you think of Game 3 Pass versus what we've talked about before as 4 base sales, are you familiar with data and 5 information that your team had told to 6 developer partners that being on Game Pass is 7 accretive or incremental to stand-alone game 8 purchases? 9 A. In general, I am familiar with how 10 we view users in Game Pass and their 11 purchasing power or purchasing habits, I 12 guess. 13 Q. And for example, when your team is 14 talking to developers about including games 15 on Game Pass, your team will tell developers 16 that being on Game Pass pushes discovery of 17 games, correct? 18 A. Yes, I -- yes. For certain games, 19 yes. 20 Q. And Game Pass users are more likely 21 to try new games as opposed to non-Game Pass 22 users; is that fair? 23 A. The causality there is difficult to 24 correlate on whether people who play more 25 games subscribe to Game Pass or Game Pass 265 1 P. Spencer - Highly Confidential 2 causes people to try more games, but it is 3 factually true that subscribers today try 4 more games than non-subscribers. 5 Q. And is it fair to say that the 6 average game in Game Pass sees an increase in 7 users beyond a game that is not in Game Pass? 8 A. In general that would be true. 9 Q. And that the average game in Game 10 Pass sees an increase in total sales even 11 outside of Game Pass; is that fair? 12 A. I don't know that the average game 13 in Game Pass sees an increase in sales. 14 There are instances of games that do, but 15 I -- in terms of average, I don't know the 16 answer. 17 MR. WEINGARTEN: Let's look at 18 PX1510, please. 19 (Exhibit PX1510, E-mail chain with 20 attachment, Bates MSFT-2R-08189182, 21 was introduced.) 22 BY MR. WEINGARTEN: 23 Q. Let me know when you have it, 24 please. 25 A. I have it. 266 1 P. Spencer - Highly Confidential 2 Q. Okay. And the first page, 001, is 3 an e-mail chain and the subject is Updated 4 Denali, D-E-N-A-L-I, Comms Material. 5 Do you see that? 6 A. I do. 7 Q. And was Denali the code name for 8 Activision as part of Microsoft's planned 9 purchase of Activision? 10 A. Yes. 11 Q. Okay. And the e-mails on page 1 12 are dated January 14, 2022. 13 Do you see that? 14 A. I do. 15 Q. So, this is a few days prior to the 16 announcement of Microsoft's planned 17 acquisition of Activision, correct? 18 A. Yes. 19 Q. The top e-mail is from Frank Shaw 20 and it's to Sarah Bond, Tim Stuart, Matt 21 Booty, others, with a copy to you and some 22 others, correct? 23 A. Yes. 24 Q. What's Frank Shaw's role at 25 Microsoft at this time? 267 1 P. Spencer - Highly Confidential 2 A. He is head of public relations for 3 Microsoft. 4 Q. And if you look at the e-mail on 5 001, is this e-mail transmitting messaging 6 documents, press releases and timelines 7 related to the Denali announcement, that is 8 the announcement of Microsoft's purchase of 9 Activision? 10 A. This e-mail is forwarding, yes, the 11 documents that are leading up to our -- 12 communicating our plan to acquire Activision 13 Blizzard King. 14 Q. And if you look at page 006, 15 please, you see the document there that's 16 headlined Project Denali Worldview & 17 Messaging? 18 A. I do. 19 Q. And it points -- in this document 20 it references Marvel, M-A-R-V-E-L, and Amaze, 21 A-M-A-Z-E. 22 Was Marvel the code name for 23 Microsoft? 24 A. From my memory it is, but I don't 25 remember specifically. 268 1 P. Spencer - Highly Confidential 2 Q. Okay. And is Amaze the code name 3 for Activision? 4 A. I haven't heard Amaze -- I've 5 always heard Denali as the code name for 6 Activision. 7 Q. Look on page 006. 8 A. I can see how it's written and I 9 would agree that Amaze in this document looks 10 like it's a code name for Activision. 11 Q. The document has several sections, 12 right? Page 6 has overall message, page 7 13 has a message about consumers, choice and 14 value, Amaze employees, culture, Marvel 15 employees, culture. 16 Do you see that? 17 A. Yes, I do. 18 Q. Page 8 has a section called 19 Partners, Commitment & Scale. 20 Do you see that? 21 A. I do. 22 Q. Okay. Take a look at those bullets 23 under Partners, please. I just have a couple 24 of questions about that. And it follows up 25 on what you and I were talking on about a 269 1 P. Spencer - Highly Confidential 2 minute ago. 3 A. Okay. Let me read them. 4 (Document review.) 5 Okay. I've read it. 6 Q. Okay. So, when it talks about 7 partners there, to whom is that referring? 8 Do you have an understanding? 9 A. Yes. Other third-parties 10 non-Microsoft, non-Activision developers 11 or studios or publishers that publish on 12 Xbox. 13 Q. Okay, great. 14 And the third bullet under Partners 15 is part of the message that Microsoft is 16 gonna communicate to partners? 17 A. Yes. Yes. 18 THE WITNESS: I lost him. Can you 19 hear? 20 MS. WINKINSON: No. 21 THE COURT REPORTER: 22 Mr. Weingarten, we don't hear you. 23 Should we go off the record? 24 MS. WINKINSON: Yes, we should. 25 THE COURT REPORTER: We're off the 270 1 P. Spencer - Highly Confidential 2 record. 3 (Off-the-record discussion was 4 held.) 5 THE COURT REPORTER: We're back on 6 the record. 7 MR. WEINGARTEN: Please read back 8 the question, thank you. 9 (Referred to portion of the record 10 was read back by the court reporter.) 11 BY MR. WEINGARTEN: 12 Q. And in the message in the third 13 bullet, says: 14 Our plan is to include Amaze games 15 in XGP. 16 And Amaze here we agree means 17 Activision? 18 A. Yes. 19 Q. And XGP is Game Pass? 20 A. Xbox Game Pass, yes. 21 Q. Okay. 22 Which will grow the opportunity for 23 you to increase engagement and monetization 24 through Xbox Game Pass. Game Pass drives 25 discovery which in turn drives monetization. 271 1 P. Spencer - Highly Confidential 2 And then there's some stats. Do 3 you see those stats, sir? 4 A. Yes, I do. 5 Q. Okay. Nine out of ten Game Pass 6 subscribers try new games because they 7 subscribe, and when a game enters Game Pass 8 engagement increases by 8X. 9 Do you see that? 10 A. I do see that. 11 Q. And those are statistics that your 12 team was gonna communicate to third-party 13 developers about the benefits of this -- 14 strike that, about Game Pass, correct? 15 A. That's right. 16 Q. And the next one says: 17 Game Pass users spend more time 18 gaming plus 44 percent and spend more on 19 content plus 24 percent than prior to 20 subscribing. 21 Do you see that? 22 A. I do. 23 Q. To your knowledge, these figures 24 that your team was going to present to 25 third-party developers of games are accurate, 272 1 P. Spencer - Highly Confidential 2 right? 3 A. To my knowledge, these are 4 accurate. 5 Q. And the conclusion of the bullet 6 point is: 7 Game Pass is accretive to 8 stand-alone game sales, so participation can 9 grow the overall revenue potential for your 10 game or games. 11 Is that right? 12 A. That was part of our messaging for 13 this acquisition, yes, to our partners. 14 Q. Do you agree with that? 15 A. I agree that there are many games 16 for which Game Pass is accretive stand-alone 17 game sales. 18 Q. You can put that document aside. 19 My next questions, sir, are about 20 cloud, xCloud. 21 So, am I right that one reason that 22 cloud gaming is attractive to Microsoft 23 Gaming is that it has a much larger total 24 addressable market than console gaming? 25 A. I would say it's the primary 273 1 P. Spencer - Highly Confidential 2 reason, it's interesting to Microsoft. 3 Q. And the total addressable market 4 for cloud gaming is sometimes estimated as 5 three billion people; is that fair? 6 A. Yes. 7 Q. And the total addressable market 8 for consoles is roughly 200 million; is that 9 fair? 10 A. Yes. 11 Q. Is monthly average users a 12 statistic or metric that you use to evaluate 13 the health of xCloud? 14 A. Monthly active users, MAU? 15 Q. I apologize. 16 Does MAU stand for monthly active 17 users? 18 A. It does. 19 Q. And is that a metric you use to 20 evaluate the success of the xCloud business? 21 A. It is one of the metrics we look at 22 for xCloud, yes. 23 Q. Is it the most important metric? 24 A. I would not say it's the most 25 important metric, but it was one of the 274 1 P. Spencer - Highly Confidential 2 metrics. 3 Q. What are the other metrics please? 4 A. Daily active users, average session 5 length, how long do people engage, the 6 revenue generated per streaming player. 7 These would be other metrics that we would 8 look at. 9 Q. Do you have a sense of Microsoft's 10 investment to date in xCloud? 11 A. Only at a capability of saying 12 something like hundreds of millions of 13 dollars, a few hundreds of millions of 14 dollars. 15 Q. And do you know what xCloud's MAU 16 is as of today? 17 A. The last monthly active users I 18 have from memory is four million monthly 19 active users, but that could be a bit out of 20 date. 21 Q. And do you remember what month that 22 figure is for? 23 A. July or August, sometime after 24 Fortnight coming to xCloud. 25 Q. So, July or August of 2022? 275 1 P. Spencer - Highly Confidential 2 A. Yes. Sorry, 2022. 3 Q. And how has the trend been in 4 xCloud monthly active users since launch? 5 A. It was fairly flat from launch with 6 slight growth. We did launch Fortnight into 7 xCloud in June, which is a free-to-play game, 8 and saw a bump-up in usage, but it has 9 remained relatively flat after that initial 10 bump-up in usage. 11 Q. And for fiscal year 2022, what was 12 the goal for end-of-year monthly active 13 users, if you remember, for xCloud? 14 A. I don't remember. 15 Q. Do you remember if xCloud is 16 performing at, below or above goal for 2022? 17 A. I -- my sentiment is that we are 18 below goal on xCloud MAU in last fiscal year. 19 Q. And looking at all the metrics that 20 you listed, how is xCloud doing relative to 21 its goals for fiscal year '22? 22 A. So, '22 is our last fiscal year 23 that ended at the end of June. We are behind 24 in almost every metric. 25 Q. How is 2023 going, fiscal year 276 1 P. Spencer - Highly Confidential 2 2023? 3 A. After '22, we would've decreased 4 our ambition on our goals, so -- and we've 5 decreased investment in xCloud. So, we're 6 early in this fiscal year, but I would say we 7 are probably closer to our goals, but our 8 goals have diminished fairly significantly 9 since 2022. 10 Q. And when you say decreased in 11 investment, what is the budgeted investment 12 for fiscal year '23 for xCloud? 13 A. There are people in the 14 organization that still work on supporting 15 our customers, we have cut almost all feature 16 work and investment in new server 17 infrastructure, new xCloud infrastructure. I 18 don't have a specific number in my head, but 19 I would -- as the head of the business, I 20 would say our investment in specific xCloud 21 is probably in the single digit millions in 22 fiscal year 2023, outside of the cost of 23 serving the existing players that are there. 24 Q. And does that reflect a change 25 with respect to Microsoft's strategy for 277 1 P. Spencer - Highly Confidential 2 cloud? 3 A. It reflects a realization that 4 streaming console games to a phone is not 5 enough for us to gain relevance on phone 6 platforms with video games. And that would 7 be -- maybe it's a learning that's resulting 8 in a change. 9 Q. So, what's the impact of that 10 change on Microsoft's user-centric strategy 11 of allowing a player to play any game 12 anywhere? 13 A. It's critical that we find a 14 capability of building games that players 15 want to play on any device. So, it's up 16 to -- our necessity that we increase our 17 creative and business model diversity of our 18 creative studios. We also have real friction 19 with Google and Apple for distribution of 20 xCloud on those devices which creates real 21 discovery and customer scenario and customer 22 successes, which is even up the necessity 23 that we find content that we own on mobile 24 devices to help us overcome the friction that 25 the platform holders put in place. 278 1 P. Spencer - Highly Confidential 2 Q. So, is it no longer Microsoft 3 Gaming's ambition to allow players to play 4 Xbox console games on their mobile devices? 5 A. No, it's still our ambition. 6 Q. Is it -- I'm just trying to 7 understand. 8 So, that's still the ambition. Has 9 the ambition just moved further out in 10 timeline as opposed to being abandoned? 11 A. Our ambition is to -- for Xbox to 12 be a platform for gamers of any kind of game 13 on any device that they see as interesting 14 and kind of delightful to them. The 15 specifics that you asked about of streaming 16 console games to a phone, is that still our 17 strategy? That was never the strategy, that 18 was part of us becoming relevant on phones. 19 But we've always had this expectation that in 20 order for us to be relevant on the largest 21 gaming platform, we were going to have to 22 have content that is native to those 23 platforms that are part of Xbox. 24 Q. And do you still think that cloud 25 gaming is the future of gaming? 279 1 P. Spencer - Highly Confidential 2 A. Games that are available on any 3 device and let players engage with those 4 games across any screen, I believe is the 5 future of games. In a way, it's the reality 6 of today for the biggest games. 7 Q. So, some games are console games 8 where the user experience is to prefer them 9 on console, some games might be mobile games 10 where the user experience that's preferred is 11 to experience the game on mobile, is that the 12 idea? 13 A. No. I'm trying to differentiate 14 between xCloud and the use of the word 15 "cloud." 16 Q. Right. 17 A. XCloud specifically is running a 18 console -- we have consoles in data centers 19 that run Xbox games that we then stream the 20 gameplay to a device that -- a phone that 21 somebody has. 22 Cloud as an enabler for today's 23 games, Fortnight, Roblox, Ancient Impact, 24 those games allows somebody to start playing 25 on one device, log off and start playing on 280 1 P. Spencer - Highly Confidential 2 another device, and the game still recognizes 3 who they are and the largest games on the 4 planet are available on multiple devices. 5 Minecraft being one from us, as I said, 6 Fortnight, Roblox, these are games, Apex, 7 that are available on many devices, and 8 there's a cloud infrastructure that allows 9 that scenario to work. 10 Q. I see. 11 And so, the cloud infrastructure 12 that allows that latter scenario to work, is 13 that a different cloud infrastructure than 14 the xCloud infrastructure you were talking 15 about? 16 A. Yes, yes. It's more of a peer 17 development platform that somebody would use 18 like AWS or Azure or Google, Google services 19 to run a game that meets a customer where 20 they are, as opposed to xCloud which is a 21 very narrow use of cloud if we're gonna run 22 legacy console games on an Xbox in a data 23 center and stream that game from that console 24 in the data center to someone's mobile 25 device. 281 1 P. Spencer - Highly Confidential 2 Q. So, at the initial part of our 3 conversation here, we were focusing on xCloud 4 and talking about metrics for xCloud, 5 correct? 6 A. That's right. 7 Q. So, now I want to ask you about 8 cloud -- 9 A. Okay. 10 Q. -- as you mean it. 11 How is Microsoft doing in terms of 12 strategy and implementation on cloud in the 13 latter sense that you're using it, not just 14 xCloud? 15 A. Yeah. We are investing -- we are 16 behind AWS, which is the default solution 17 that most games develop -- game developers 18 will use for building their, I'll say, 19 service-based games, so we don't over use 20 this cloud term. But it's an area of 21 investment for us, but we have big 22 competition with Google Cloud, and AWS is by 23 far the leader. 24 Q. So, to the extent you were talking 25 earlier about a decrease in investment in 282 1 P. Spencer - Highly Confidential 2 xCloud, that is not part of an overall 3 decrease in investment in cloud by Microsoft, 4 correct? 5 A. They aren't related. I will say 6 that if you looked at the investment in 7 gaming this year, our investment in cloud as 8 a development platform is flat to down, just 9 given the economic realities of our business 10 given the global economic situation. 11 Q. And what is the -- no, strike that. 12 What's the most accurate figure you 13 can give for Microsoft's annual investment in 14 cloud as distinct from xCloud for gaming? 15 A. For gaming, probably 50, 60 million 16 a year that we would invest against the cloud 17 gaming development platform opportunity. 18 Q. So, there are two buckets of 19 investment then, there's one in xCloud and 20 there's one in cloud gaming development; is 21 that right? 22 A. Yes. There are many areas of 23 development, but those are two of them. 24 Q. Okay. And how are -- what's your 25 projection or understanding of how investment 283 1 P. Spencer - Highly Confidential 2 in cloud at Microsoft is going to increase, 3 decrease or stay the same over the next three 4 years? 5 A. It will depend on our ability to 6 find market fit with developers and drive 7 more revenue with -- now developers that use 8 our cloud, most of them do not ship on Xbox 9 or PC, most of them are mobile developers, 10 it's really a platform for game developers 11 anywhere. So, we look at the opportunity 12 there and try to map it to the revenue 13 generation that we see in that development 14 platform grow. 15 Q. And when we were talking about 16 Google Stadia before, was Google Stadia's 17 model like the xCloud model where it was 18 about shipping or streaming console type 19 games to a user on mobile? 20 A. Google and Amazon have both. 21 Stadia specifically is their consumer 22 streaming service that a consumer would 23 subscribe to and purchase games on in order 24 to play streamed games. They also, as part 25 of GCP, which is their equivalent of 284 1 P. Spencer - Highly Confidential 2 Microsoft Azure, have a cloud game 3 development focus to support global game 4 developers regardless of what platforms 5 they're trying to ship on, and Amazon would 6 be the same thing. 7 Q. Sorry to interrupt you. 8 A. I said, Amazon would be the same 9 with Luna as their -- to consumer version of 10 Stadia and AWS also having game development 11 focus. 12 Q. Okay. So, when we think about or 13 when you think about competition for xCloud, 14 that would include Stadia, correct? 15 A. Yes. 16 Q. It would include Luna from Amazon, 17 correct? 18 A. Yes. 19 Q. Would it include what was 20 PlayStation Now, but has been rebranded as 21 part of PlayStation Plus? 22 A. It would. 23 Q. Okay. It would include -- sorry, 24 go ahead. 25 A. NVIDIA's GeForce Now I would 285 1 P. Spencer - Highly Confidential 2 include. 3 Q. Yep. Anybody else as a competitor 4 to xCloud? 5 A. There are some local companies, a 6 company like Ubitus that does some streaming 7 of games to Nintendo Switch. But at the kind 8 of larger end of the scale, I think we've 9 listed all of the biggest competitors. 10 Q. Stadia has shut down its 11 first-party content, has announced complete 12 shutdown, correct? 13 A. Yes. 14 Q. Do you have any sense for what the 15 MAU is for Luna? 16 A. I do not. 17 Q. Do you have any sense of whether 18 it's bigger or smaller than xCloud? 19 A. I don't actually, no. 20 Q. How about GeForce Now from NVIDIA, 21 do you have any sense of the MAU for GeForce 22 Now? 23 A. I believe NVIDIA had announced a 24 ten million user milestone, I don't know if 25 they announced that as a MAU number or a 286 1 P. Spencer - Highly Confidential 2 lifetime number. But my expectation is that 3 GeForce Now is bigger than our xCloud monthly 4 active users. 5 Q. Do you have any sense of -- strike 6 that. 7 Would you agree that Stadia lacks a 8 content catalogue sufficient to support its 9 ambitions to be a cloud streamer? 10 A. I don't agree with that. 11 Q. Okay. Why not? 12 A. Google had invested to get a number 13 of quality games on Stadia and they had 14 announced an upcoming catalogue of new games 15 that would come to Stadia given the minimal 16 investment a customer would have to make up 17 front to become a member of Stadia. They 18 didn't have the console purchase to try to 19 entice somebody to become part of Stadia that 20 I think their catalogue was sufficient to get 21 people to try the service. 22 Q. I think we may have touched on this 23 before. Is one of the reasons that you 24 believe Stadia ultimately failed is the lack 25 of a console to help push user and developer 287 1 P. Spencer - Highly Confidential 2 engagement? 3 A. No. Almost the opposite. I think 4 Google has immense surface area to drive 5 traffic to Stadia. My view, as I stated 6 earlier, was that Stadia's miss was a 7 positioning themselves as a replacement for 8 your console to customers and also really 9 leading with purchasing games on Stadia as 10 the kind of fundamental business model 11 construct that they used. And I don't see a 12 demand for people who aren't going to buy a 13 device but are willing to spend $60 on one 14 game. 15 Q. Sony PlayStation Plus offerings for 16 streaming PlayStation games, does Sony run 17 that on Azure, A-Z-U-R-E? 18 A. They do not. 19 Q. Do you know what technology they 20 run that on? 21 A. I do not. 22 MR. WEINGARTEN: Let's take a look 23 at and introduce PX1110, 1110. 24 (Exhibit PX1110, E-mail with 25 attachment, Bates MSFT-2R-03052561, 288 1 P. Spencer - Highly Confidential 2 was introduced.) 3 BY MR. WEINGARTEN: 4 Q. Let me know when you have that, 5 sir. 6 A. Yeah, it's open. 7 Q. Page 1 is an e-mail from Tim 8 Stuart, doesn't have a To line, but it's 9 dated March 11, 2020. 10 Do you see that? 11 A. I do. 12 Q. Says: 13 Team, on Monday, Gaming had a 14 presentation slot at the quarterly board 15 meeting. At each board meeting, one of 16 Microsoft's CSAs present and this was our 17 turn. 18 Do you see that? 19 A. I do. 20 Q. And if you turn to page 002, the 21 attachment, it says Gaming Board Presentation 22 2020, Phil Spencer, Head of Gaming. 23 Do you see that? 24 A. I do. 25 Q. So, is this document a copy of a 289 1 P. Spencer - Highly Confidential 2 presentation that you gave to the Microsoft 3 board of directors for around March of 2020? 4 A. Let me just scroll through to make 5 sure it's the right document. 6 Q. Sure. 7 A. (Document review.) 8 Okay. Yeah. 9 Q. Was the answer to my question yes? 10 A. The answer was yes. 11 Q. Okay. Let's look at page 003, it's 12 the first page of the presentation under 13 Gaming, Overall assessment. Second item 14 says: 15 Games content remains key 16 differentiator to success with consumers. 17 Do you see that? 18 A. My first and overall assessment is 19 Gaming continues to see growth at scale one 20 to three people. 21 Q. Right. And the next one down, the 22 next item. 23 A. Gaming content remains key 24 differentiator to success with consumers, 25 yes. 290 1 P. Spencer - Highly Confidential 2 Q. That's what you told the board in 3 2020? 4 A. Yes. 5 Q. And you told the board that 6 Microsoft's investment in Game Studios 7 acquisitions enables Microsoft Gaming to 8 deliver quality content in fiscal year '21 9 and fiscal year '22? 10 A. Yes. 11 Q. And then you wrote: 12 Google, NVIDIA, N-V-I-D-I-A, Amazon 13 exploring cloud game streaming, but lack the 14 content portfolio and partner relationships 15 today to attract and retain customer base. 16 Do you see that? 17 A. I do. 18 Q. Okay. That's what you told the 19 board in 2020, right? 20 A. Yes. 21 Q. Okay. And at that time xCloud, you 22 estimated -- I'm just looking a few more 23 paragraphs down, you estimated xCloud be the 24 biggest game streaming service globally; is 25 that right? 291 1 P. Spencer - Highly Confidential 2 A. At that point, yes. 3 Q. Okay. If we flip ahead to 4 page 024, please. And it's a slide that's 5 headlined Game Streaming Competitive 6 Landscape. 7 Do you see that? 8 A. Almost there. 9 Q. Yeah, okay. Take your time. Okay. 10 And it lists, I think, the same four 11 competitors that we talked about earlier when 12 I asked you to list out competitors to 13 xCloud, right? 14 A. Yes. 15 Q. Okay. So, first on the list is 16 Google Stadia and it lists some strengths and 17 some weaknesses. But since this document was 18 created, Google Stadia has announced its 19 closing, right? 20 A. That's right. 21 Q. So, they're no longer in the 22 competitive landscape for game streaming, 23 right? 24 A. As of January of 2023 is when 25 they've announced that they would be closed, 292 1 P. Spencer - Highly Confidential 2 yes. 3 Q. Okay. Then comes Sony, and 4 strengths and weakness are large game 5 catalogue is a strength, no mobile offer is a 6 weakness, and weaker game catalogue is a 7 weakness; is that right? 8 A. At this point, yes. 9 Q. Okay. Did something -- do you 10 still hold to that assessment that Sony 11 suffers from a weaker game catalogue as a 12 weakness in game streaming? 13 A. I would equate it to the discussion 14 we had previously with their choice to not 15 ship their first-party games into their 16 service. 17 Q. Okay. So, Sony's decision to 18 generally not do day and date release into 19 cloud streaming means they have a weaker game 20 catalogue in cloud streaming? 21 A. That decision weakens their 22 catalogue yes. 23 Q. And -- 24 A. To your previous question -- 25 (Cross-talk.) 293 1 P. Spencer - Highly Confidential 2 A. I was just -- 'cause I'm looking at 3 the data here, to your previous question 4 about the number of games, I think the 5 quantity of games is listed there. 6 Q. Do you remember at this time -- it 7 says 650 games for Sony. 8 Do you remember how many games at 9 this time xCloud had for streaming? 10 A. We've never had more than 400, so 11 it would have to be a number smaller than 12 that. 13 Q. But despite the quantitative 14 advantage Sony has over xCloud, they still 15 have a weaker game catalogue because they 16 don't do day and date release on streaming, 17 correct? 18 A. It's a subjective interpretation, 19 but their decision to not ship their 20 first-party games day and date into their 21 subscription, I do think weakens their game 22 catalogue. 23 Q. Okay. And we're talking here not 24 just about subscription, we're talking about 25 streaming in this slide, correct? 294 1 P. Spencer - Highly Confidential 2 A. For Sony, I don't believe there is 3 any streaming outside of the subscription, so 4 I think they are the same. 5 Q. For NVIDIA GeForce Now, strength is 6 low cost to serve and the weakness is that 7 they lost support from a number of publishers 8 including EA, Activision Blizzard, Bethesda 9 and 2K Games. 10 Do you see that? 11 A. I do. 12 Q. And is that still accurate that 13 they had -- GeForce Now lacks support for 14 those publishers/developers? 15 A. I don't know. I believe certain 16 people, certain publishers have re-enabled 17 GeForce Now after some initial backlash that 18 they got when they launched. I don't know if 19 any of these specific have reengaged on 20 GeForce Now, so I don't know the answer to 21 that. 22 Q. Do you know if Activision Blizzard 23 games are available on GeForce Now? 24 A. I don't know. I don't know if they 25 are available on GeForce Now. I haven't 295 1 P. Spencer - Highly Confidential 2 looked. 3 Q. What's your educated guess? 4 MS. WINKINSON: Object to calling 5 for speculation and especially 6 guessing. 7 But you may answer if you can. 8 A. Given that today Activision's games 9 are not in Steam or on Ubisoft or Epic, which 10 are the storefronts that GeForce Now 11 supports, I think that logic flow would say 12 that Activision Blizzard games are not 13 available on GeForce Now. 14 Q. That's a good guess. I know 15 GeForce Now is offering is described as also 16 requiring the user to buy the game just like 17 Stadia did, right? 18 A. It's not just like Stadia. You're 19 buying the PC version of a game that you can 20 play on your PC, and you then have the 21 ability to stream from GeForce servers, where 22 with Stadia there was no non-streaming 23 version of that game available. 24 Q. And so, is NVIDIA limited -- sorry. 25 Is NVIDIA GeForce Now limited to PC 296 1 P. Spencer - Highly Confidential 2 versions of games? 3 A. I believe that's true, yes. 4 Q. So, you won't get the Xbox version 5 of a game, for example, streaming through 6 GeForce Now, right? 7 A. You would not get the Xbox version 8 of a game. We do ship all of our games on PC 9 as well as console, so there is a way for us 10 to enable NVIDIA to stream the equivalent 11 game, it's just running on an Xbox -- on a PC 12 infrastructure as opposed to the console 13 infrastructure. 14 Q. And has Microsoft enabled streaming 15 of any of its games on GeForce Now? 16 A. I don't believe so. 17 Q. Okay. And Amazon is listed as all 18 TBD, to be determined here. And the strength 19 is expansive cloud infrastructure. 20 Do you know sitting here today what 21 Amazon's offering for cloud streaming is? 22 A. I don't have the specifics on 23 Luna's business model or different pricing 24 tiers or how it overlaps with Amazon Prime. 25 I know there are -- there are overlaps in 297 1 P. Spencer - Highly Confidential 2 their different subscriptions and business 3 models, but I don't -- I don't have them 4 memorized. 5 Q. Do you know how games are available 6 on Luna? 7 A. I don't. 8 Q. Do you know, are there any Xbox 9 games that are available on Luna for 10 streaming? 11 A. There are no Xbox games that are 12 available for streaming on Luna. 13 Q. Any PlayStation games available on 14 Luna for streaming? 15 A. I don't know that. 16 Q. Do you know, is Amazon's Luna 17 service or stream like GeForce Now a stream 18 of PC games? 19 A. My understanding it is a stream of 20 PC games different than GeForce Now. My 21 understanding is that there is a subscription 22 that gives you access to free games as part 23 of the subscription which is different than 24 GeForce Now. 25 Q. Aware of any issues that GeForce 298 1 P. Spencer - Highly Confidential 2 Now has with limited server supply? 3 A. What we have heard from partners is 4 that NVIDIA lacks scale in certain 5 geographies for streaming of games. 6 Q. And do you know what geographies in 7 particular that you heard GeForce lacks 8 scale? 9 A. I don't have a specific list of 10 geographies, no. 11 Q. Is the United States one of those 12 geographies? 13 A. I don't know that. 14 Q. Does it streaming on Google Stadia 15 require a developer to point their games to 16 Linux, L-I-N-U-X? 17 A. I'm not correcting, but the 18 pronunciation is Linux. Sorry. 19 Q. No, no, please help me. 20 A. Google Stadia is Linux-based. So, 21 yes developers port -- they either port their 22 game to Linux or there are Windows emulators 23 that run on Linux that allow Windows' games 24 to run on Linux platform unaltered. 25 Q. And is requiring a game to port to 299 1 P. Spencer - Highly Confidential 2 Linux a friction point for getting developers 3 to develop games for Stadia or was it in past 4 tense? 5 A. Any time a developer has to add 6 another platform to the list of target 7 platforms they launched, there's a certain 8 amount of friction and overhead in doing 9 that, yes. 10 Q. So, would you agree that was a 11 competitive disadvantage for Google, need to 12 port games to Linux? 13 A. They made that decision, so my 14 assumption would be that they made a balanced 15 business decision based on many inputs that 16 potentially also gave them competitive 17 damages. So, assuming people are logical in 18 making their decision, I would assume they 19 made a decision believing that that gave them 20 the best competitive advantage to choose 21 Linux as a platform. 22 Q. What do you think? 23 A. I don't think porting to Linux was 24 a critical factor in them not succeeding. 25 And I'm going longer winded, which I 300 1 P. Spencer - Highly Confidential 2 apologize, Valve just launched a gaming 3 handheld called the Steam Deck, which is 4 selling well in the market and is also 5 Linux-based, and it's running PC games on 6 this gaming handheld device. So, there are 7 examples in the market of Linux-based gaming 8 hardware that is succeeding. Clearly Linux 9 was a decision for developers thinking about 10 supporting Stadia, but I wouldn't say it was 11 some kind of critical flaw in their strategy. 12 Q. Does NVIDIA GeForce Now require a 13 developer to port to a different kind of 14 system to have its games used? 15 A. My understanding is no, that 16 they're -- they are running the Windows -- my 17 understanding is they are running the Windows 18 versions of their games and on their own 19 hardware, to be clear, that NVIDIA makes the 20 GPU that many game PCs use. So, they have 21 very kind of intimate knowledge of how games 22 run and a cost advantage of building out 23 their cloud based on their own silicon being 24 the back straight of it. 25 Q. What about Luna in terms of having 301 1 P. Spencer - Highly Confidential 2 to port development or games that are 3 developed into a different system? 4 A. My understanding is that Luna is 5 running Windows. 6 Q. When you think about the future of 7 gaming, is there a world in which a console, 8 right, simply becomes a dumber endpoint and 9 is just a vehicle for accessing content 10 through a cloud? 11 A. I believe we will see consoles that 12 are lighter weight local hardware, less 13 expensive that allow people to stream games 14 to a TV or the device that they're plugged 15 into, not to the exclusion of people also 16 running games locally. 17 So, I see it as another option for 18 people playing games that they might play in 19 many -- kind of, in many context on many 20 different devices. 21 Q. And Microsoft developing such a 22 cloud lightweight hardware endpoint? 23 A. We prototyped -- the code name was 24 Keystone, in case it's in documents. We 25 prototyped a device last year and decided not 302 1 P. Spencer - Highly Confidential 2 to go forward with that iteration of 3 Keystone. We made that decision March, April 4 of last year, maybe May, and there's no 5 current active development on a Keystone next 6 in our development teams today. 7 Q. I saw a blog post or a tweet that 8 you had where there was a device on a shelf 9 and there was some banter in your post and 10 the official Xbox account I gather about 11 revealing a prototype. 12 So, what's the back story there 13 vis-à-vis a prototype or a light console 14 device that would do streaming? 15 A. That is said Keystone device, it is 16 on my shelf behind me. Our social team took 17 a photo, had nothing to do with Keystone 18 being on my shelf. And certain -- we talked 19 publically about Keystone, so it's not a 20 secret. We also talked about the fact that 21 we were not gonna go forward with this 22 iteration of that prototype. So, our social 23 team, after the photo went out, thought that 24 they should clarify that that is the Keystone 25 that is no longer in development. So, the 303 1 P. Spencer - Highly Confidential 2 Xbox Twitter handle responded something about 3 the boss not having old prototype hardware on 4 its shelf. 5 Q. And even though that's old 6 prototype hardware, has Microsoft Gaming 7 given up on an ambition for a sort of more 8 lightweight cloud device for people to use? 9 A. No, I -- we've recently partnered 10 with Logitech, who has built a handheld cloud 11 gaming device, and Game Pass works on that 12 device as does GeForce Now, and I believe 13 Luna is also on that device. That's not from 14 us, but we obviously work in partnership with 15 other hard- -- other goal is to allow people 16 to play the games they want to play on the 17 devices that they choose to play on. 18 Q. And as we've been talking here 19 about now this Logitech device, a prototype 20 Keystone, talked about xCloud, correct, or is 21 that about cloud -- that's not about cloud 22 development, right, that's about xCloud? 23 A. Going back to our differentiation 24 between cloud as a development platform and 25 cloud as a distribution capability, it is 304 1 P. Spencer - Highly Confidential 2 about xCloud. 3 I can't help myself. I will just 4 say from a customer standpoint, we just want 5 the customer to feel like they're a member of 6 Xbox, and how the bits actually get to the 7 screen shouldn't be something that our 8 customers overly fixate on. 9 Q. Sony does not have a cloud service, 10 correct? Let me strike that. 11 Sony's not a player in cloud 12 infrastructure in the same way that Microsoft 13 is with Azure or Amazon is with AWS or Google 14 is with its Google Cloud product, correct? 15 A. Correct. 16 MR. WEINGARTEN: Maybe it's a good 17 time to take a break. 18 THE WITNESS: Okay. 19 MS. WINKINSON: Thank you. 20 MR. WEINGARTEN: Take ten. 21 THE COURT REPORTER: We're off the 22 record. 23 (Whereupon, a brief recess was 24 taken.) 25 THE COURT REPORTER: We're on the 305 1 P. Spencer - Highly Confidential 2 record. 3 BY MR. WEINGARTEN: 4 Q. Couple of quick questions, I think 5 to clear up the confusion that I engendered 6 about xCloud versus cloud. 7 So, one is, is it correct that 8 xCloud's service is now known as or will be 9 known as Xbox cloud gaming; is that right? 10 I can't hear you. Can you hear me? 11 THE COURT REPORTER: I don't hear 12 Mr. Spencer either. Or Ms. Wilkinson, 13 I don't hear you. 14 Should we go off the record? 15 MR. WEINGARTEN: Can you hear me? 16 THE COURT REPORTER: I can hear 17 you now. 18 MR. WEINGARTEN: Okay, I'm sorry. 19 Mr. Spencer, can you hear me? 20 THE COURT REPORTER: Do you want 21 to go off the record? 22 MR. WEINGARTEN: Let's go off the 23 record. 24 THE COURT REPORTER: We're off the 25 record. 306 1 P. Spencer - Highly Confidential 2 (Off-the-record discussion was 3 held.) 4 THE COURT REPORTER: We're back 5 on. 6 BY MR. WEINGARTEN: 7 Q. Is xCloud being rebranded as Xbox 8 Cloud Gaming? 9 A. xCloud was our internal code name. 10 It's always been known as Xbox Cloud Gaming 11 in the market, which I know adds to the 12 confusion between these two things. 13 Q. So, one can use the terms xCloud 14 and Xbox Cloud Gaming interchangeably? 15 A. If you include the Xbox part then, 16 yes, it would denote, at least for me, that 17 it's the streaming of our Xbox console games. 18 Q. Okay. Thank you. 19 So, what is the plan then going 20 forward for Xbox Cloud Gaming? 21 A. It's unclear. We -- as I said, for 22 this year, we're decreasing investment really 23 to zero as we wait to see if we can find 24 market fit with the service of streaming Xbox 25 games to devices, specifically mobile devices 307 1 P. Spencer - Highly Confidential 2 as our strategic need is to somehow unlock 3 the, what I will call the duopoly on the 4 mobile platforms of Apple and Google, that if 5 our Xbox Cloud Gaming has to make progress on 6 mobile in order for it to really make sense 7 for us as part of our strategy. 8 Q. And who made the decision to pause 9 new investments in Xbox Cloud Gaming? 10 A. It was a decision that I made that 11 was driven by our business requirements in 12 the fiscal year 2023. 13 Q. And if the fiscal picture improves, 14 would you increase new investments in Xbox 15 Cloud Gaming in future fiscal years? 16 A. Still unclear. One of the things I 17 mentioned we did was put Fortnite, which is 18 one of the world's biggest games, into Xbox 19 Cloud Gaming in June. That is not part of 20 Game Pass, so Fortnite is not in Game Pass, 21 it's a free-to-play game. To see -- and 22 Apple had kicked Fortnite out of its store, 23 so we had a hit piece of content that had 24 been on mobile, on iOS and Android, that was 25 now gone to see if our cloud delivery of 308 1 P. Spencer - Highly Confidential 2 Fortnight on mobile might uptick given its 3 lack of a local runtime version and our 4 success there has been fairly marginal. So, 5 we'll continue to work on trying to find 6 market fit, but I fundamentally believe 7 without native mobile games as part of Xbox 8 that we will fail to make traction on mobile 9 devices. 10 Q. When you say native mobile games on 11 Xbox, you mean native mobile games on Xbox 12 Cloud or Xbox console? 13 A. As part of the Xbox offering. So, 14 as we need to find some way to drive 15 discovery on mobile devices for our content, 16 and right now Apple and Google will not let 17 us put anything in the case of iOS in their 18 store as it relates to Game Pass or Xbox 19 Cloud Gaming, so we have to do it all through 20 the mobile browser on their phone. 21 On Google, we can put a Game Pass 22 app in their store, but they won't let us 23 monetize. So, we have to find a way to block 24 the discovery that those two platform holders 25 are blocking from us, which is why back when 309 1 P. Spencer - Highly Confidential 2 we talked about in the Activision strategic 3 thesis, this universal store I see as being 4 critical, we have to find a way to get mobile 5 gamers to look at Xbox as a place where they 6 would go to find great games for them to 7 play. 8 MS. WINKINSON: Did you mean to 9 say find a way to block the discovery 10 that those two platform holders are 11 blocking from us? 12 THE WITNESS: If that's what I 13 said, I didn't mean. We have to find 14 a way to get discovery on those 15 devices those platform holders are 16 blocking today. 17 MR. WEINGARTEN: I'm sorry. Who 18 was just speaking? 19 MS. WINKINSON: Me. I could tell 20 he misspoke, so I asked him if that's 21 what he meant by "blocked." 22 MR. WEINGARTEN: That's fine. I 23 didn't see your mouth moving, so I 24 thought there was another person. 25 Q. What's Ashley McKissick's role with 310 1 P. Spencer - Highly Confidential 2 respect to Xbox Cloud Gaming decisions? 3 A. Ashley McKissick is a direct report 4 of mine, and she runs the engineering teams 5 for all of our platform efforts across PC, 6 console and Xbox Cloud Gaming. And she will 7 often surface her opinion of decision that we 8 should make on our platform investments to be 9 agreed upon and ratified by me. 10 Q. What is on the product roadmap 11 going forward for Xbox Cloud Gaming? 12 A. Not a -- not a lot of new 13 investment as I said. There are some 14 partnerships like this Logitech device that's 15 getting ready to launch. We launched an app 16 on Samsung TVs back in June. We have a plan 17 to bring that to -- right now it's just new 18 2022 TVs, we have a plan to bring that to 19 2021 TVs. So, there is some device expansion 20 in the plan just with partner devices, but 21 that's about it. 22 Q. And the app for the TV, that's not 23 about mobile content, correct, because the TV 24 screen is bigger and -- 25 A. That's right. 311 1 P. Spencer - Highly Confidential 2 Q. -- in terms of what you call market 3 fit, right? 4 So, what games are you expecting 5 people to stream over the app on the Samsung 6 TV? 7 A. Yeah, the same games that they 8 would play on their TV if a console was 9 connected. So, you use a controller, you're 10 able to stream through the app the Xbox Game 11 Pass portfolio of Xbox Cloud streaming 12 available games, so you're playing your large 13 screen games. 14 Q. And why are you offering that, is 15 that to develop an audience that's accretive 16 to the console audience? 17 A. Yeah, we look at the purchase price 18 of a console as a barrier to some gamer -- 19 some people interacting with our content and 20 services. So, we've -- we build a strategy 21 that doesn't require that people buy our 22 console in order to play our games. And our 23 work with Samsung would be an example of 24 that. 25 Q. Any other examples of that? 312 1 P. Spencer - Highly Confidential 2 A. Well, I'd say that Logitech 3 handheld device is an example of that. I 4 mentioned Valve's Steam Deck, which is kind 5 of a larger handheld PC that we worked with 6 Valve prior to launching to ensure Xbox and 7 Xbox Cloud Gaming would work on that device. 8 I think just today we announced 9 with Google that Chromebooks are now 10 supporting Xbox Cloud Gaming as part of their 11 offering, and I saw some of that on social 12 this morning. Our goal is to allow people to 13 play on the devices that they have. 14 Q. The Logitech device, is that about 15 mobile games being streamed or is that about 16 Xbox console-type games being streamed? 17 A. It's Xbox console games streamed to 18 a device that's bigger than a phone. If you 19 were to look at it, it mirrors more than what 20 a Nintendo Switch might look like in terms of 21 form factor. We don't have any mobile games 22 today at any kind of scale inside of our 23 service, other than Minecraft, which happens 24 to be a successful game on mobile plat- -- on 25 all platforms, including mobile. 313 1 P. Spencer - Highly Confidential 2 Q. And in Chromebook, what's the 3 discovery mechanism for Xbox Cloud Gaming; is 4 it the browser or is it going to be a 5 pre-installed app? 6 A. Our intent would have a 7 pre-installed app, we're kind of still in 8 negotiations with Google on this. Clearly 9 the browser would work any edge or Chrome 10 browser today on a device can go to 11 Xbox.com/play and see the portfolio of 12 console games that can be streamed. But it's 13 a more native experience if we have an app on 14 the device. 15 Q. And is that going to be exclusive 16 that only Xbox Cloud Gaming would be the only 17 cloud gaming streaming service on Chrome? 18 A. I don't believe that's true. We -- 19 this is just a partnership we have with them, 20 but much like the Logitech device or the 21 Samsung TV that also lists GeForce Now and 22 others, that I would expect on Chrome that 23 the other streaming -- cloud streaming 24 platforms would be available there. 25 Q. Anything else on the product 314 1 P. Spencer - Highly Confidential 2 roadmap for Xbox Cloud Gaming? 3 A. We've done some work recently when 4 you search for games using Bing. If the game 5 happens to be on our Xbox Cloud Gaming 6 portfolio, we will allow -- we surface a play 7 button in the search results to allow someone 8 to go play that game directly in browser. 9 And we would like to do similar work with 10 YouTube and Google and Amazon Twitch to 11 enable click-to-play games, but all of those 12 require obviously partnerships and 13 co-development. So, you'll see an 14 aspirational list, but what happens in 2023 15 is to be seen. 16 Q. When you say there'd be a 17 click-to-play when a Bing search result 18 surfaces a game that can be played on Xbox 19 Cloud Gaming, that has to be a free-to-play 20 game, right? 21 A. Free-to-play, if you search for 22 Fortnite, clearly would work. We only have 23 one free-to-play now on cloud which is 24 Fortnite, so it's a solution set of one. 25 Our goal would be to also allow a 315 1 P. Spencer - Highly Confidential 2 limited trial of play for games that are in 3 the subscription to give people the ability 4 to try a game. That technology isn't really 5 tied to the cloud streaming of the game, it's 6 more of a store entitlement capability, but 7 we would like to give the ability for people 8 to try a game via a click in a web browser or 9 on a different discovery surface like 10 YouTube, TikTok or Twitch. 11 Q. So, we've talked about products 12 that are on Xbox Cloud Gaming roadmap. 13 What about products that have been 14 taken off the roadmap in the last year or so? 15 A. We -- most of the financial 16 investment is increased Xbox consoles into 17 your data centers for global expansion. It's 18 a fairly significant infrastructure cost to 19 continue to put consoles in those data 20 centers. So, we have stopped further 21 geographic expansion of our Xbox Cloud 22 infrastructure. 23 We also had on the roadmap 24 expansions of more free-to-play games coming 25 to Xbox Cloud Gaming in addition to Fortnite. 316 1 P. Spencer - Highly Confidential 2 And we were in discussions with other 3 television manufactures like LG on bringing a 4 similar app to those TVs to allow the same 5 scenario we have with Samsung. 6 Q. Do you think any of those will come 7 back on the roadmap? 8 A. As I said, it -- my hope is 9 gentlemen, like, my hope is this desire that 10 we have to allow people to play the games 11 they want where they want to play comes to 12 fruition and that we see customer demand for 13 this, and we would allow people to play Xbox 14 games on their Switch, on their PlayStation 15 on LG TVs through the service offering that 16 we have. It's really the only way we think 17 we get to three billion gamers is if we're 18 not dependent upon any one business model or 19 one device ecosystem. And if you were going 20 to be dependent on one device, you'd 21 obviously have to pick mobile at those 22 numbers. 23 Q. Who decides whether a product comes 24 on or off the Xbox Cloud Gaming roadmap? 25 A. Ashley McKissick manages the team 317 1 P. Spencer - Highly Confidential 2 directly, and her and I in our one-on-one 3 discussions or through a gaming leadership 4 team discussion would ratify decisions that 5 she's making based on the resource trade-off 6 she has to drive. 7 Q. So, she'll make a recommendation 8 and has to go to you for ultimate authority 9 to take something on or off the roadmap; is 10 that fair? 11 A. She is empowered largely to make 12 many decisions on her own. Some of these 13 decisions have, say, the potential for 14 partner disappointment. Think about we're 15 stopping LG app, development of the app for 16 LG TVs, so she would want to have a 17 discussion at our leadership team table with 18 me to make sure I was okay with that, with 19 Lori Wright, who runs business development, 20 who would have to manage the relationship 21 with LG as an example, or even content 22 partners, game partners, that maybe were 23 doing something in conjunction with work that 24 we were doing. So, there is a need for us to 25 communicate these kind of decisions. 318 1 P. Spencer - Highly Confidential 2 Q. Okay. So, I don't mean this 3 contentiously, but you've described a slowing 4 of investment -- new investment in Xbox Cloud 5 Gaming, right? 6 A. Yes. 7 Q. And you said that if this 8 business -- Microsoft Gaming business stays 9 where it is on console-based, that's 10 detrimental for the business into the future; 11 is that correct? 12 A. Yes. 13 Q. So, what's left? 14 A. I know I'm in a deposition, I 15 shouldn't chuckle. 16 Our current fiscal year priorities 17 last year and continuing this year is growth 18 on PC. There are roughly 200 million gamers 19 on PC. We have a portfolio of games that do 20 work for PC gamers, but to be somewhat 21 self-serving, but just to play it back to why 22 we're on this call, last year at this time 23 was a real look at mobile development 24 capabilities so that we can grow in mobile to 25 help create discovery and monetization 319 1 P. Spencer - Highly Confidential 2 capability for Xbox on those mobile 3 platforms, which is why we started looking at 4 some of the largest mobile content creators 5 that might be available. 6 So, PC and mobile are kind of the 7 what's next or what now, I forget how you put 8 it. 9 Q. What percentage of gaming's 10 revenues are derived from PC gaming? 11 A. We had our first billion dollar 12 year last year in PC gaming all up out of a 13 $16 billion, roughly, gaming top line revenue 14 business. That was our largest PC gaming 15 revenue year ever. So, it's growing, but as 16 you can see from the percentages, sales still 17 small. 18 Q. And mobile, same question, please. 19 A. Kind of nonexistent. The only 20 places we make money on mobile is Minecraft 21 and you could argue that, and you'd be right, 22 that it has more to do with Minecraft than 23 Xbox and it's -- Minecraft all up was a 24 billion dollar business last year, the mobile 25 component was maybe a hundred million, 320 1 P. Spencer - Highly Confidential 2 $200 million business. 3 MR. WEINGARTEN: Let's look at 4 PX1111, please. 5 (Exhibit PX1111, E-mail chain with 6 attachment, Bates MSFT-2R-03087430, 7 was introduced.) 8 BY MR. WEINGARTEN: 9 Q. Let me know, sir, if that loads 10 correctly in the window. 11 A. Yes, I have it up. 12 Q. Great. PX1111-001 is an e-mail, 13 you're not on the e-mail, from Mr. Hampton to 14 Mr. West, dated December 4, 2019. 15 Do you see that? 16 A. I do. 17 Q. And he writes: 18 JFYI, quarterly board report for 19 the Gaming CSA. 20 Do you see that? 21 A. I do. 22 Q. And there's a PowerPoint 23 presentation attached that's called Q2 BoD 24 2020 - State of the Business - Gaming. 25 You see that? 321 1 P. Spencer - Highly Confidential 2 A. I do. 3 Q. Okay. And if you turn to page 003 4 of PX1111, that's the first page of the 5 attachment. 6 Do you see that? 7 A. I do. 8 Q. It says: 9 State of the business, 10 December 2019. And please take your time to 11 look through, but I am gonna ask you if this 12 appears to be a presentation that was made to 13 the board of directors December of 2019 about 14 the gaming business? 15 A. What I believe happened was this 16 presentation was given to the board of 17 directors. I don't believe I actually 18 presented it to them. I believe it was given 19 to them kind of background as part of that 20 quarter's board meeting. That would be my 21 estimation on what happened here. 22 Q. And even though you didn't present 23 it, is it fair to say that you sponsored the 24 content to the board of directors? 25 A. Yes. 322 1 P. Spencer - Highly Confidential 2 Q. You read it, reviewed it, made sure 3 it was accurate before it went to the board? 4 A. Yes. 5 Q. Okay. Some of the slides have the 6 slide notes included. So, for example, if 7 you look at page PX1111-004, the Slide 1 8 Notes. 9 See that? 10 A. Yes. 11 Q. Okay. And so, is that consistent 12 with your recollection that this was 13 transmitted in written form and not orally 14 presented to the board that these notes pages 15 sort of there for the board to read and help 16 understand what they were seeing? 17 A. No. I would -- when the Microsoft 18 board comes in, there is a day where Amy Hood 19 goes through an overall business presentation 20 where she's talking about the end to end 21 business of the company, which is, I believe, 22 where this gets presented. I do not 23 believe that we would've given the board the 24 meeting -- the speaker notes here. This 25 either for Kurt DelBene, who's no longer at 323 1 P. Spencer - Highly Confidential 2 the company, but his team was responsible for 3 pulling this kind of content together, or 4 Amy, I would have to -- I can do it, I can 5 read through all of the notes to see if I 6 think the board received these notes or if 7 this was part of prep for somebody else who 8 was presenting. I do not normally present 9 this document to the board. 10 Q. Let's take a look at page 004. If 11 you look at those notes, does that help give 12 you a sense of whether these are notes that 13 gaming put together for Ms. Hood, someone on 14 her team to help with their presentation to 15 the board, or whether this went to the board 16 directly? 17 A. I can't tell from that note. I can 18 scroll down to the other notes to see where I 19 thought -- if I thought the notes were 20 included with what the board received. 21 Q. Let's take a look at, for example, 22 the next -- go to page 006 please, it's the 23 gaming it's a slide that sort of just has the 24 Gaming title on it. 25 Do you see that? 324 1 P. Spencer - Highly Confidential 2 A. I do. 3 Q. And then there's some -- a box in 4 the bottom corner with what I would describe 5 as key performance indicators for gaming; is 6 that fair? 7 A. Yes. 8 Q. And the status of those indicators. 9 Do you see that? 10 A. I do. 11 Q. I take it a red diamond is not good 12 and a green circle is good? 13 A. Yes. 14 Q. Okay. And then the next page 007, 15 Slide 3 Notes, it says: 16 In gaming, we are pursuing an 17 expansive opportunity. 18 You see that? 19 A. Yes, I do. 20 Q. Whether the notes were meant for 21 the board to read or Ms. Hood to understand 22 as part of preparing, you try to be accurate 23 in the notes, right? 24 A. The notes can be a little looser 25 than the actual presentation. But, yeah, we 325 1 P. Spencer - Highly Confidential 2 don't try to put misleading information in 3 the notes, yes. 4 Q. So, on Slide 3 notes there on 5 page 007, says: 6 In gaming, we are pursuing an 7 expansive opportunity - from the way games 8 are created and distributed to how they are 9 played and viewed. Our key growth bets are 10 in content, community, cloud. 11 Do you see that? 12 A. I do. 13 Q. And content, it says: 14 Exclusive game content, creation of 15 content subscriptions. 16 You see that? 17 A. I do. 18 Q. Community is about playing, 19 watching, and communicating about games. 20 And cloud is streaming of game 21 content to new endpoints and services for 22 game developers. 23 Do you see that? 24 A. I do. 25 Q. The cloud component here sounds 326 1 P. Spencer - Highly Confidential 2 like the cloud component you and I were 3 discussing a few minutes ago; is that 4 correct? 5 A. The Xbox Cloud Gaming, yes. 6 Q. So, that's an accurate depiction 7 today of your vision for Xbox Cloud Gaming, 8 that cloud bullet? 9 A. I wouldn't call it complete today, 10 just given what we've learned from the time 11 of this to today, but there's nothing in this 12 description that I think is inaccurate. I 13 just don't think it's complete. 14 Q. And with community, would you agree 15 that that is not inaccurate with respect to 16 your understanding today? 17 A. Community I think is more off than 18 I would've described. To me, the most 19 enduring community feature on Xbox is the 20 friends that people create. And friends is a 21 kind of a digital tag of -- between two 22 people, which is left out of this description 23 here, the network of people that you -- it 24 says playing, watching about games, but 25 there's a playing with your friends that I 327 1 P. Spencer - Highly Confidential 2 think is a critical component of our 3 community that's missing. 4 Q. So, it's not -- like cloud, it's 5 not the bullet under community is inaccurate 6 vis-à-vis today's strategy or understanding, 7 it just could be enhanced? 8 A. Yes. 9 Q. Be added to? 10 A. Yeah, it's more. 11 Q. Let's talk about -- 12 A. To me, it misses more of the big 13 point than the cloud comment probably not 14 overall that important. 15 Q. Okay. And then on content, it 16 says: 17 Exclusive game content and creation 18 of content subscriptions. 19 Do you see that? 20 A. I do. 21 Q. Okay. Same as the others, accurate 22 depiction of the understanding of content, or 23 would you add something? 24 A. I would just say the word 25 "exclusive" here is kind of a plate holder 328 1 P. Spencer - Highly Confidential 2 for first-party Xbox Game Studios' games 3 which aren't really exclusive to much. So, I 4 think the word is somewhat misleading in 5 terms of the games itself, but -- so, that's 6 how I would -- I would modify this, if I were 7 to describe our content strategy. 8 Q. And are you saying that at the time 9 you remember that when this deck was put 10 together or whatever your role was that the 11 word "exclusive" was meant to mean 12 first-party studio? 13 A. Yes, because at this time, we were 14 shipping our games on PC and on console, 15 selling our games in other marketplaces like 16 Steam. So, the kind of dictionary definition 17 of the word "exclusive" doesn't really match 18 how we were treating our content portfolio. 19 So, it's just a factual definition of 20 exclusive game content. It's not really 21 exclusive to much when we're shipping it in 22 multiple places. I guess you -- 23 Q. Who put the word "exclusive" -- 24 A. I would assume David Hampton has 25 been putting together the deck. 329 1 P. Spencer - Highly Confidential 2 Q. Okay. And even though you were the 3 sponsor of the deck, you didn't edit out the 4 word "exclusive" and put first-party studio? 5 A. I don't know that I ever reviewed 6 the notes for this presentation. 7 Q. The point leading up to the bullet, 8 the little sentence says: 9 Our key growth bets are in. 10 So, I think you were just talking 11 about descriptively what was going on with 12 content at this time, but the lead in to the 13 bullet is about bets, that's about the 14 future, correct? 15 A. Or just things that we're investing 16 in now, yes, that will lead to success in the 17 future. 18 Q. So, our key growth bets means 19 things we're investing in now that will lead 20 to success in the future and one of those is 21 content, exclusive game content and creation 22 of content subscriptions, right? 23 A. We believe investing in content is 24 key to our future growth, yes. 25 Q. And this one says, exclusive 330 1 P. Spencer - Highly Confidential 2 content, but your testimony is that that's 3 misleading, it should say first-party 4 content? 5 A. My testimony is that our games are 6 not exclusive to what -- to Xbox consoles. 7 So, I actually think the definition of the 8 word "exclusive" here doesn't apply to any -- 9 what is it exclusive to? So, since we ship 10 our games on multiple devices, I just think 11 it's factually incorrect to say that the 12 games are actually exclusive. I guess 13 they're exclusively owned by Microsoft Xbox. 14 But in terms of how you apply the games in 15 the market, the games are available in 16 multiple places, which to me is the opposite 17 of exclusive. 18 Q. Well, not all Microsoft first-party 19 studio games are available on the all 20 devices, correct? 21 A. All devices have the ability to 22 play -- well, all web-enabled devices have 23 the ability to play Xbox games. And I think 24 the word "exclusive," if something is 25 available on two places, I think that is not 331 1 P. Spencer - Highly Confidential 2 exclusive. 3 Q. Are you saying -- okay, let's talk 4 about exclusive. 5 So, when you're talking about the 6 word "exclusive," in your view, if a game is 7 playable on PC and Xbox console, it's not 8 exclusive? 9 A. That's not just my definition. 10 There are many people in the gaming community 11 that use the phrase that Xbox has no 12 exclusives, because our games are available 13 on PC, and Sony has -- one of our console 14 competitors as well as Nintendo -- has not 15 shipped their games on PC at the same date 16 in order to remain exclusive. So, it's -- 17 that -- that's why I'm picking on the term 18 just because we treat our content and deliver 19 our content in a different manner than teams 20 that are actually or companies that are 21 actually exclusive in where they distribute 22 their content to the devices that they build. 23 Q. If there were an Xbox game -- let 24 me strike that. 25 Is there an example of a 332 1 P. Spencer - Highly Confidential 2 first-party Microsoft studio game that is 3 available on Xbox and PC but not on 4 PlayStation? 5 A. There are examples of Xbox games 6 that are on PC and Xbox and not on 7 PlayStation. 8 Q. Are there games that Microsoft 9 Gaming had launched with day and date release 10 on Xbox console and PC, but made a decision 11 not to do a day date release on PlayStation 12 of that same title? 13 A. There are games -- there are games 14 that meet that criteria, yes. 15 Q. Can you please give me an example 16 or two of such a game? 17 A. Halo Infinite which launched last 18 year launched on PC, both in our store and in 19 Steam, as well as on Xbox console, and did 20 not launch on PlayStation. 21 Q. And was that a decision that Xbox 22 gaming -- strike that. 23 Was the decision made to launch 24 only on the platforms you mentioned and not 25 PlayStation, was that a decision made by 333 1 P. Spencer - Highly Confidential 2 Microsoft Gaming? 3 A. Yes. 4 Q. Would you use the word exclusive to 5 describe that game, its launch? 6 A. I would not as a factual definition 7 of exclusive. The term "exclusive" in 8 console games comes from games that are only 9 available if you purchase a closed platform 10 console and they are used to drive platform 11 adoption, if you want to play game X, you 12 must buy this device to play game X. The 13 decision that we have of shipping our games 14 on PC kind of by definition necessitates that 15 you don't have to buy or enables you to not 16 have to buy an Xbox console to play our 17 games. The term "exclusives" as it's used 18 here, gets used as shorthand for games that 19 we build because the historical console 20 market is that console manufacturers only 21 ship their games on their own hardware. 22 So, it is part of the vocabulary, 23 I'm just saying that when I'm describing to 24 someone who's maybe not in the industry, the 25 term -- if I tell you that a game is 334 1 P. Spencer - Highly Confidential 2 exclusive, an Xbox exclusive game, my feeling 3 is you're gonna interpret that to mean it's 4 only available on an Xbox console, which 5 isn't true. So, if I was describing to the 6 board, in my words, I would ensure that I 7 make sure I talk about where games are made 8 available. 9 Q. And are there games that are 10 available only on Xbox console that are not 11 also available on PC? 12 A. Only historical games that were 13 created prior, probably 2014, 2015. We do 14 have some games that we launch on PC that 15 do not launch on console, just given kind of 16 input or different device capabilities, but 17 I'm -- I'm struggling to remember the last 18 game that we launched that was not 19 sim-shipped on PC and Xbox console and I 20 can't think of one. 21 In the last year, the two console 22 exclusive games that we've launched were 23 launched on PlayStation. 24 Q. Okay. So, according to that 25 information, in your view, Microsoft has not 335 1 P. Spencer - Highly Confidential 2 launched an exclusive Xbox game since 2014? 3 A. I use the term "Xbox" to mean where 4 if people are playing games on PC, Xbox games 5 on PC, I consider those Xbox customers. The 6 application that you would run on the PC is 7 called Xbox. Again, I'm trying to do this 8 from memory to think of the last console 9 exclusive game that we launched, and I'm 10 struggling to come up with -- there might be 11 a couple since 2014, but I would say our 12 strategy for many, many years and our 13 implementation has been that games will be 14 available on PC and console on the same day. 15 Q. I guess -- I'm just trying to 16 understand. The word "exclusive" in your 17 understanding does not apply if a game 18 launches on both Xbox and PC, but you can say 19 exclusive Xbox launch is on both Xbox console 20 and PC because you view PC users as Xbox 21 users? 22 A. I would say a game is an Xbox game, 23 if it launches. If you look at our launch 24 language, we struggle with this in our 25 marketing. We have terms like Xbox or 336 1 P. Spencer - Highly Confidential 2 console launch exclusives, which is to talk 3 about a game where the Xbox console is the 4 only console a game is launching on knowing 5 that the game is also available on PC. 6 Maybe -- I know I'm probably not 7 supposed to ask you questions, I would just 8 ask for how you define exclusive when you're 9 asking me whether it's exclusive? 10 Q. You're right, you don't really get 11 to ask me questions. But I'm trying to 12 understand, I'm trying to understand how you, 13 as the head of Microsoft Gaming, thinks about 14 exclusivity? 15 A. Right. 16 Q. It's a help to me, but I -- you can 17 understand, I'm expressing confusion 18 because -- and I just want to make sure I'm 19 clear when I think about this later: A game 20 is not exclusive, in your understanding, to 21 Xbox, it's not an exclusive game to Xbox if 22 it launched day and date on PC also, right? 23 A. Yes. Let me -- let me try to go 24 through logic, I'll try to do it quickly 25 because I know we're late. 337 1 P. Spencer - Highly Confidential 2 I recognize when I made the 3 decision to ship our first-party games on PC 4 and on Xbox console on the same date, that I 5 would sell fewer consoles when we made that 6 decision. Certain players who would've 7 purchased the console to play those games 8 will decide to just play those games on their 9 PC instead and save the money that they would 10 use to go buy a console. We make that 11 decision because we have a view that gamers 12 are gonna play -- eventually gamers just want 13 to play the games that they want on any 14 screen that's capable of displaying the game. 15 So, there's no reason for us to maintain what 16 I would say is more of a historical way of 17 running a gaming business of everything must 18 be on our plastic, on the devices that we 19 sell. 20 So, when we made that decision, we 21 knew that our console sales would be impacted 22 based on people who might have said, in order 23 to go play Halo, I must go buy an Xbox 24 console. But we thought in the longer term 25 of playing the games you want where you want 338 1 P. Spencer - Highly Confidential 2 to play them, that we would make this 3 decision. 4 Now, Sony will still market that 5 they have the best exclusive games and that's 6 a term they will use in the vocabulary of 7 competing in the console space, and we will 8 try to use the same term to remain 9 competitive to say we have a good portfolio. 10 But I'm just trying to be honest and 11 transparent in that the games themselves are 12 not actually exclusive to the Xbox console 13 given that you can play on PC. 14 So, it's why -- if I were talking 15 to the board -- the board, as much as they 16 know the details about our business and 17 remember them would know that our game 18 shipped on PC and console and we might use 19 the term "exclusive" as shorthand. But when 20 you ask me the question of is it critical to 21 our strategy that the games be exclusive, 22 then I think you're applying a different 23 definition of that word that isn't actually 24 how we use the content in running the 25 business. 339 1 P. Spencer - Highly Confidential 2 And sorry, I went long. 3 Q. No, that's okay, that's very 4 helpful. 5 When you made the decision -- let 6 me strike that. 7 So, it was your decision to do day 8 date PC launch for Xbox console games as 9 well? 10 A. Yes. 11 Q. You alluded to the fact that when 12 you made that decision, you knew it would 13 cost you Xbox console sales, correct? 14 A. Some number, yes. 15 Q. Did you talk about that with anyone 16 at Microsoft at the time? 17 A. From memory, I believe it was 2015, 18 that would've been just a gaming leadership 19 team discussion. 20 Q. And when you talked about it with 21 gaming leadership team about the decision to 22 not have a game exclusive just to Xbox 23 console, but to make it on Xbox console and 24 day date PC release, did you talk about the 25 impact that would have on Xbox console sales? 340 1 P. Spencer - Highly Confidential 2 A. We would've had a discussion, yes, 3 about the impact to console sales in addition 4 to presumably increased PC revenue from the 5 increased sale of those games on PC, so it 6 would've been a complete discussion. And 7 frankly, the marketing challenge it would 8 create relative to Nintendo and Sony as their 9 marketing exclusive games and our ability to 10 market a lineup of games that require you or 11 now don't to buy an Xbox to go play. So, 12 yeah, there's a marketing and PR angle to 13 this. But frankly, still plays out in the 14 market when you look at how our brand is 15 sometimes talked about relative to exclusive 16 games. 17 Q. Can you explain what you mean by 18 that last bit about still plays out about how 19 your brand Microsoft Xbox is perceived in the 20 market vis-à-vis exclusive? 21 A. Yeah. There are still people in 22 the gaming community that says, why would 23 anybody ever buy an Xbox? There are no games 24 that you have to buy on Xbox in order to go 25 play and it's a commentary that's out there, 341 1 P. Spencer - Highly Confidential 2 press periodically ask me about it. And the 3 choice that we made is we're gonna put the 4 decision in the hands of the customer. If a 5 customer decides they want to play on their 6 television, we have a great console for them 7 to go play those games on. If they decide 8 they want to play on their PC and with our 9 Xbox Cloud Gaming, if they decide they want 10 to play on another device, they can go do 11 that. 12 So, it's in line with our strategy, 13 but it is still a point that our competitors, 14 more Sony than Nintendo, uses against us in 15 talking about the strength of their exclusive 16 game item. 17 And I -- not -- it'll sound a 18 little victimy, going back all the way to the 19 discussion about Sony signing third-party 20 games, paying third-party games, to skip Xbox 21 console all up, it kind of feeds to this 22 narrative of not only do you not need to buy 23 Xbox to play even the Xbox games, that there 24 are hit third-party games that are skipping 25 Xbox console altogether. 342 1 P. Spencer - Highly Confidential 2 Q. And the instances which you're 3 aware where Sony paid a developer to skip 4 Xbox, you mean they paid to skip Xbox console 5 or to skip both console and PC? 6 A. Console, Xbox console. 7 Q. So, to your knowledge, has Sony 8 ever paid a developer or publisher to keep a 9 game on PlayStation with the exclusion of PC 10 as well? 11 A. I wouldn't have insight into that. 12 I will say the two games that we launched 13 exclusive on PlayStation last year, Death 14 Loop and Ghostwire from our ZeniMax studios, 15 there was not language to exclude PC. They 16 didn't ship in the Xbox store on PC, they 17 shipped in Steam. And I frankly don't know 18 if the language excluded them shipping in our 19 Xbox PC store. But most of the instances, I 20 have seen have specifically targeted Xbox 21 console. 22 Q. So, when Sony's paying for 23 exclusivity, a Sony exclusive as they use 24 that term, can mean a game that is available 25 on both Sony PlayStation and PC, correct? 343 1 P. Spencer - Highly Confidential 2 A. The term is usually used with the 3 games that Sony is building or Microsoft is 4 building, so they're owned studios. And 5 Sony's policy, for the most part, is that 6 they will not launch their first-party 7 exclusive console games on PC the same day 8 they launch. 9 So, as an example, the upcoming God 10 of War Ragnarok, which is their big launch 11 this holiday, launches only on PlayStation. 12 They have, over the years, started to window 13 or after some number of months or years to 14 launch the games on PC, but they still choose 15 to launch their games as exclusive to their 16 console and it allows them to talk about that 17 word "exclusive" in a -- in a very -- in a 18 more kind of clean way. 19 Q. And you were talking about 20 first-party studios there. But as the 21 third-parties, Sony will use the term 22 exclusive and pay for exclusivity in your 23 experience for a game that has launched on 24 both PlayStation and PC? 25 A. They will -- they will kind of 344 1 P. Spencer - Highly Confidential 2 migrate to the terminology that we cobble 3 together similarly around console launch 4 exclusive to mean that of the consoles that a 5 game is launching on, most of those, like I 6 said, are the third-party games where they're 7 paying to exclude Xbox as a vast majority of 8 their first-party games do not launch on PC 9 the day and date. 10 Q. That's very helpful. 11 When Project Scarlett was coming 12 toward launch, was there an effort to get 13 games or titles to be Scarlett-launch 14 exclusive? 15 A. It's a normal course of a console 16 launch that you would have a portfolio of 17 games that are only available on the new 18 generation of hardware. For us, we didn't 19 get much traction on having any games that 20 were exclusive to console and definitely not 21 exclusive to Scarlett. But I'm sure there 22 was some internal discussions about do we 23 want to invest for some Scarlett exclusive 24 games. 25 Q. And a Scarlett exclusive game in 345 1 P. Spencer - Highly Confidential 2 that context would mean only on console and 3 not PC? 4 A. It could mean either. In general, 5 when I'm using it now, we many times will 6 look for games that are technical 7 demonstrations of the increased hardware 8 capability that's available in a new console 9 that someone would buy. And so, we'd be 10 looking at technical games that are technical 11 showcases of the new hardware. Gamers would 12 love that those were exclusive to that 13 hardware because they feel that it would take 14 more full advantage than what they call 15 cross-gen games, games that are available on 16 multiple generations. 17 Q. I guess I'm confused. Putting 18 aside cross-gen, game built for Gen 9 19 hardware, can showcase Gen 9 hardware on 20 either a PlayStation 5 or an Xbox series, 21 right? 22 A. Yes. 23 Q. And so, I guess when you're doing a 24 Scarlett launch -- if Microsoft were 25 considering a Scarlett launch exclusive, are 346 1 P. Spencer - Highly Confidential 2 there games that launched that were console 3 exclusive to Scarlett and not including of 4 PC? 5 A. I can't think of one that was 6 exclusive to Scarlett and did not ship on PC. 7 Q. What about the game, I don't know 8 the full name, Yakuza? 9 A. From Sega, Yakuza, yeah. 10 Q. Was that a Scarlett launch 11 exclusive? 12 A. I don't remember the game as a 13 Scarlett launch exclusive. 14 Q. And the phrase "Scarlett launch 15 exclusive," when you use that phrase or when 16 folks use that phrase at Microsoft, that 17 means just Scarlett console or Scarlett 18 launch exclusive can mean console plus PC? 19 A. Scarlett launch exclusive, there's 20 no firm definition, could've included PC 21 would be my interpretation of the term. 22 Q. All right. 23 MR. WEINGARTEN: Let's put PX1060 24 in the chat, please. Not in the chat, 25 in the document viewer, please. 347 1 P. Spencer - Highly Confidential 2 (Exhibit PX1060, E-mail chain, 3 Bates MSFT-2R-00657795, was 4 introduced.) 5 BY MR. WEINGARTEN: 6 Q. Let me know, sir. Okay, great. 7 Take a look at the document, it's 8 only three pages of e-mails, let me know when 9 you've had a chance to familiarize yourself, 10 please. 11 A. (Document review.) 12 I've read it. 13 Q. Okay. My question is about the, 14 one, two -- third e-mail down from the top on 15 page 001. 16 A. Yes. 17 Q. From you, dated June 2, 2020. 18 Do you see that? 19 A. I do. 20 Q. And the game I guess that's being 21 discussed here is a game called Yakuza Like a 22 Dragon? 23 A. That's right. 24 Q. You write: 25 Just a random idea, no issues if it 348 1 P. Spencer - Highly Confidential 2 turns out there's nothing there. 3 That sentence, is that -- what are 4 you referring to there, is that about a 5 co-branded box, form factor or is that about 6 something different? 7 A. I'm relating to the e-mail further 8 down about a co-branded Xbox Series X in 9 Japan. 10 Q. Okay. So, let's put that aside. 11 You say in the next sentence: 12 It's a big deal that the next 13 Yakuza is Scarlett launch exclusive. Can we 14 say that? 15 What did you mean when you wrote 16 "the next Yakuza is Scarlett launch 17 exclusive"? 18 A. What I asked for clarity on down in 19 the mail thread, which this is related to, is 20 a Gen 9 consoles, is the game shipping on 21 PlayStation 5 and Xbox Series X/S. And the 22 team informed me that they're not shipping on 23 PlayStation 5, they're only shipping on 24 PlayStation 4. So, that means that the 25 Next-Gen consoles, the only place where you'd 349 1 P. Spencer - Highly Confidential 2 be able to play Yakuza is -- in its native 3 form, is on an Xbox Series X or S. 4 Q. So, this is an example where you're 5 using the word exclusive to mean console 6 exclusive, not PC exclusive? Strike that. 7 You're using the word exclusive 8 here to mean console exclusive, not console 9 plus PC; is that right? 10 A. I'm specifically talking about what 11 Generation 9 consoles the game will launch 12 on, which is, you can see -- in the context 13 of the mail thread, it makes sense given that 14 I learned about this from, I think, a tweet 15 from IGN that Sega was choosing to only 16 support Xbox Series X and S as it's -- in 17 Gen 9 and not to go out with a launch PS5 18 version. So, the language here is specific 19 to the context of what Sega is deciding to do 20 with Yakuza. 21 Q. So, is it fair that in some context 22 when the word "exclusive" is used in -- when 23 you use the word "exclusive" with respect to 24 a game launch, it can mean Gen 9 console 25 exclusive? 350 1 P. Spencer - Highly Confidential 2 A. Only in the context of something 3 like this that has all of the context around 4 that term right there. It would need to -- 5 you would need to have the context that's 6 available in a mail thread like this, where I 7 originally had asked if this was a -- if we 8 were the only Gen 9 console that Sega was 9 shipping on. 10 Q. Have you ever expressed to your 11 team that Microsoft Gaming in this calendar 12 year, 2022, needs some "launches"? 13 A. Yes. 14 Q. All right. And have you ever told 15 your team that there's a lot of talk among 16 the GLT about having a big AAA launch per 17 quarter, but there's gonna be a big gap 18 between big exclusive launches on our 19 platform? 20 A. Yeah. 21 Q. Did you ever tell -- 22 A. Yes. 23 Q. -- ever talk about that? 24 A. Yes. 25 Q. And in that context -- well, let me 351 1 P. Spencer - Highly Confidential 2 just show you the document in PX1052 -- 3 MR. WEINGARTEN: Can we put that 4 in the document viewer? I was trying 5 to go faster, but there's no way 6 around it. PX1052. 7 (Exhibit PX1052, E-mail chain, 8 Bates MSFT-2R-07498463, was 9 introduced.) 10 BY MR. WEINGARTEN: 11 Q. I guarantee you if I ask you a 12 question, your counsel will correctly say 13 show him the document, so... 14 MS. WINKINSON: I've been very 15 good about that. 16 MR. WEINGARTEN: That's why I'm 17 showing him the document. 18 MS. WINKINSON: Yes, you are. 19 Q. PX1052, do you have that? Okay. I 20 want to ask you about the e-mail on page 6, 21 e-mail that starts the whole chain off. 22 A. Yes. 23 Q. Okay. It's from you to some senior 24 leaders in gaming, right? 25 A. It is. 352 1 P. Spencer - Highly Confidential 2 Q. Dated May 7, 2022, right? 3 A. It is. 4 Q. You say: 5 With the news that Starfield is 6 going to miss holiday, have a big 7 parenthetical, still not a ton of clarity on 8 the launch date of Redfall and Stalker 2 9 development so impacted by the war in 10 Ukraine, I feel we are in a huge hole with 11 our games lineup, both for platform marketing 12 differentiation and our Game Pass content. 13 Do you see that? 14 A. Yes. 15 Q. Then you're talking about a hole in 16 content lineup for both console and Game 17 Pass, correct? 18 A. And PC. 19 Q. And PC, okay. 20 And then you say: 21 We keep talking a bit AAA a quarter 22 in the service. And it feels like we are 23 likely to go through a gap of almost 24 16 months between big exclusive launches on 25 our platform, Halo Infinite being our last on 353 1 P. Spencer - Highly Confidential 2 December 8, 2021. 3 Do you see that? 4 A. I do. 5 Q. When you write "a bit AAA," is that 6 a typo, did you mean "big AAA"? 7 A. Yes, I meant "a big." 8 Q. You meant to say "big"? 9 A. I did, yes. 10 Q. So, here you're saying big 11 exclusive launches on our platform, and you 12 mention Halo Infinite as a last example of a 13 big exclusive launch. 14 Do you see that? 15 A. I do. 16 Q. Is Halo Infinite launch just on 17 Xbox console or was it console and PC? 18 A. Console and PC. 19 Q. So, here the word "exclusive" can 20 mean console and PC, right? 21 A. Yes. Like I said, as shorthand for 22 our first-party portfolio the term 23 "exclusive" is often used internally. 24 Q. Okay. And when you say you want 25 to -- we understand you to mean as a big AAA 354 1 P. Spencer - Highly Confidential 2 a quarter, do you mean a big AAA exclusive 3 launch per quarter? 4 A. It doesn't have to be exclusive. 5 The -- we have a strategy with Game Pass to 6 have a regular cadence of games, big games 7 that people are anticipating. I think the 8 anticipation of that game is more important 9 than it not shipping on another competitive 10 platform. 11 Q. And the next paragraph in the 12 middle, you say: 13 Talk about a good year in 2021, 14 quote, we had an amazing lineup of games. 15 Do you see that? 16 A. I do. 17 Q. Okay. And then another paragraph 18 there you say: 19 But to come off of that year with 20 no big exclusives launching in 2022 is a 21 portfolio planning miss that we can't afford. 22 Do you see that? 23 A. I do. 24 Q. And when you use the word 25 "exclusive" there, what does that mean? 355 1 P. Spencer - Highly Confidential 2 A. It's the output of our first-party 3 studios from ZeniMax and Xbox Game Studios. 4 Q. And does "exclusive" there mean 5 Xbox console plus PC? 6 A. It really means the games that 7 we're launching, but given that the games we 8 launch we launch on Xbox console and PC, then 9 yes, by kind of inference it does mean that, 10 but as I said, it's really a word used for 11 our first-party output. 12 Q. So, if you would have a third-party 13 exclusive that was available -- strike that. 14 Did you have any third-party games 15 that launched in 2022 on Xbox console only 16 and not PlayStation 5? 17 A. There were some smaller ID games, 18 independent developed games, that I would 19 have to go back and look at the portfolio to 20 choose them, but it's not uncommon that there 21 are smaller developers that can only focus on 22 one platform or another where we would do 23 co-marketing deals and they would choose Xbox 24 as their first launch platform. 25 Q. In that paragraph, when you list 356 1 P. Spencer - Highly Confidential 2 the 2021 lineup that you called amazing. 3 Do you see that? 4 A. Yes. 5 Q. There's a list of games there, did 6 all of those games -- strike that. 7 Are those all first-party games or 8 are any third-parties? 9 A. Those are all first-party games. 10 Q. Okay. Then you say: 11 There were good 3P games in that 12 time frame as well, like Back 4 Blood. 13 Do you see that? 14 A. I do. 15 Q. So, who developed Back 4 Blood? 16 A. Back 4 Blood was a game developed 17 by a studio called Turtle Rock for Warner 18 Brothers Publishing. 19 Q. And was Back 4 Blood launched on 20 Xbox only, Xbox console only? 21 A. From memory, I don't think that's 22 true, but it did launch into Game Pass on its 23 launch day. 24 Q. So, did Back 4 Blood launch on PC 25 day date with its launch date? 357 1 P. Spencer - Highly Confidential 2 A. I believe Back 4 Blood launched on 3 PlayStation PC and Xbox on its launch date. 4 That's from my memory. And on that date came 5 to Game Pass and up the list of Psychonauts 6 too also launched on PlayStation on its 7 launch day. 8 Q. Okay. 9 A. And Age 4 was only PC and did not 10 ship on console. 11 Q. So, when you're using the word "big 12 exclusive" launching in 2022, I just want to 13 be clear, you would count a game that 14 launched on Xbox console and PC as a big 15 exclusive? 16 A. In the way that we use the term 17 "exclusives" as a meaning for our first-party 18 portfolio, yes. And in fact here, as I 19 stated, I am listing a game that also shipped 20 on PlayStation in that same list, that's 21 Psychonauts 2. It's really a placeholder for 22 our first-party output. 23 Q. Halo Infinite we discussed. 24 Is that a AAA game? 25 A. Yes. 358 1 P. Spencer - Highly Confidential 2 Q. Is that what you would consider a 3 tentpole game? 4 A. That was our goal in developing it, 5 yes. 6 Q. And Halo is day date for Xbox 7 console and PC, correct? 8 A. Yes, both in our Xbox store and in 9 Steam on PC. 10 Q. And Halo does not launch on 11 PlayStation, correct? 12 A. It does not. 13 Q. Okay. What about Forza, F-O-R-Z-A, 14 that's another Microsoft first-party game 15 right? 16 A. It is. 17 Q. Is that also a AAA game? 18 A. Yes. 19 Q. Is it also a tentpole game? 20 A. Less so than Halo. Racing games 21 are a little less popular than action games. 22 But we would consider it a tentpole of our 23 portfolio. And for clarity, there's two with 24 Forza games, there's Horizon, which you see 25 here, and there's Motorsport, which is 359 1 P. Spencer - Highly Confidential 2 another Forza franchise. 3 Q. And can you define tentpole as 4 we've been using it, please? 5 A. I would say games that have a high 6 level of consumer interest prior to their 7 launch. 8 Q. What's the tent in the analogy that 9 the tentpole game is holding up? 10 A. I believe the analogy is a circus 11 tent where the pole in the middle is the 12 thing that creates the high point on the tent 13 and the roof then drapes down from that. 14 Q. So, in the analogy if the game is 15 the tentpole, what's the roof, what's the 16 circus? 17 A. Our goal would be to ship a game 18 every month into Game Pass. So, as a 19 subscriber, you would see multiple new games 20 coming. And while there might be a number of 21 games that come in a month or a quarter, 22 there are one or two games that gamers would 23 look at and say, that's the one that I'm most 24 highly anticipating for this given time 25 period. 360 1 P. Spencer - Highly Confidential 2 Q. In terms of number of titles 3 released each year by Microsoft first-party 4 studios, what's the ballpark on which 5 proportion are exclusive to Xbox console and 6 PC on day date launch versus those that also 7 go to Sony on the same terms on day date as 8 they do on Xbox PC? 9 A. I would say 80 to 90 percent of our 10 games launch on PC and Xbox console. 11 Q. And not PlayStation day date? 12 A. And not Nintendo Switch or 13 PlayStation day and date. 14 Q. Why is that the proportion? 15 A. Why like relative to what? 16 Q. Why is it 80 or 90 percent, why not 17 less, if you want gamers to play games 18 anywhere on any device? 19 A. We have games that we have acquired 20 that have audiences on other platforms, 21 Nintendo Switch and PlayStation, where we've 22 continued to ship those games, service those 23 games on those platforms. We've made that 24 commitment prior to acquisition. When you 25 think of a game like Minecraft or Doom or 361 1 P. Spencer - Highly Confidential 2 Fallout 76 or Elder Scrolls Online, these are 3 games that have existing player bases on 4 those portfolios, and we've -- and I 5 mentioned even things like Google Stadia, 6 which wasn't part of this exclusive 7 discussion. But -- so, we do work for games 8 that are launching on other platforms in 9 instances where we've made that commitment to 10 the base. We have a game that's here, 11 Minecraft Legends, which launches in the 12 middle of 2023 that will launch on Switch, 13 PlayStation, Xbox on the same date. 14 So, I'm roughly trying to do the 15 math of how many games we launch and how many 16 of them are also on PlayStation or Nintendo. 17 Q. I thought I heard you say 80 to 18 90 percent of first-party titles are on Xbox 19 console and PC and not PlayStation? 20 A. That's right. In terms of number 21 of new releases in a year, I was making a 22 rough map. I was just kind of doing, if we 23 ship five games in a year and four of them 24 are on Xbox and PC and one of them is also 25 shipping on Switch and PlayStation, I'm 362 1 P. Spencer - Highly Confidential 2 just -- I'm doing the math based on our 3 portfolio in a given year, that's all I'm 4 doing. 5 Q. And what is the benefit to 6 Microsoft having 80 or 90 percent of the 7 title releases in given year exclusive to 8 Xbox PC? 9 A. We were trying to grow a gaming 10 platform in Xbox across multiple devices 11 where people would play, and having games 12 that attract customers to that platform is an 13 important part of our strategy. 14 Q. Is Halo a multiplayer game? 15 A. Halo has a single player and a 16 multiplayer component. 17 Q. And the multiple player component 18 of Halo is also available only on Xbox 19 console and PC, correct? 20 A. That's correct. 21 Q. And does Forza have a multiplayer 22 mode? 23 A. In Forza, you can play Forza 24 Horizon 5, if we're looking at this mail, 25 multiple player. It's more part of -- it's 363 1 P. Spencer - Highly Confidential 2 not really separate mode of the game, it's 3 the way you can play the game, just the core 4 mode of the game. 5 Q. I'm sorry. Let me ask a better 6 question, I may have misused the word mode. 7 Forza Horizon, a multiple player 8 game? 9 A. Yes. 10 Q. Okay. And Forza Horizon is 11 available only on Xbox console and PC, 12 correct? 13 A. Right. 14 Q. Why not have multiplayer games 15 launch also on PlayStation so that folks can 16 have cross-platform play? 17 A. I believe right now one of the 18 biggest risks to Xbox's survival is that -- 19 what I've mentioned of Sony paying teams to 20 exclude Xbox from their shipping platforms. 21 So, if I'm shipping more content on a 22 platform that is hostile towards Xbox's 23 survival, I feel like I'm enabling an 24 aggressive competitor to further damage our 25 aspiration. 364 1 P. Spencer - Highly Confidential 2 I contrast that with Steam, which 3 you could argue is also a competitor to us, 4 they sell games, they have a gaming 5 community, but Steam is not out paying games 6 to skip Xbox and we support them. 7 So, I don't think the Sony decision 8 is necessarily a decision in perpetuity. 9 THE WITNESS: I'm going to 10 apologize, I have to use the restroom. 11 MS. WINKINSON: Yes. Can we take 12 a break? 13 MR. WEINGARTEN: Let's go off the 14 record. 15 THE COURT REPORTER: We're off the 16 record. 17 (Whereupon, a brief recess was 18 taken.) 19 THE COURT REPORTER: We're on the 20 record. 21 BY MR. WEINGARTEN: 22 Q. Is it a fair statement to say that 23 the lack of titles that were exclusive to 24 Xbox Series X console, when Xbox Series X 25 launched, negatively impacted sales of Xbox 365 1 P. Spencer - Highly Confidential 2 Series X console? 3 A. No, we continue to sell every 4 Series X that we can build even at this point 5 in the generation. 6 Q. Okay. At the time of launch, did 7 Xbox Series X have what you would consider a 8 blockbuster exclusive game that was not also 9 available on PlayStation? 10 A. It did not. 11 Q. Okay. So, to be clear about it, at 12 launch, the blockbuster games that Xbox 13 Series X had were also available on 14 PlayStation 5; is that fair? 15 A. Yeah, I would say the majority of 16 the portfolio on Xbox Series X were 17 third-party games that were available across 18 PlayStation and Xbox. We had very few 19 first-party games at the launch of Gen 9. 20 Q. And as we've been discussing, when 21 you use the term "exclusive" like we talked 22 about with the board document and I think we 23 talked about with some of the other 24 documents, that's a reference to first-party 25 content? 366 1 P. Spencer - Highly Confidential 2 A. Yes. 3 Q. Okay. Halo Infinite, for example, 4 was a first-party Microsoft game that 5 would've been Xbox exclusive at launch, but 6 it missed the launch of the console, right? 7 A. Yes, Xbox missed our launch by a 8 year. 9 Q. When you said Xbox -- 10 A. Halo missed the Xbox launch by a 11 year. 12 Q. Okay. And PlayStation 5 had at 13 least some number of games that were 14 blockbusters, that were exclusive just to 15 PlayStation 5 and not available on Xbox 16 console, correct, when it launched? 17 A. I believe most of the PlayStation 5 18 Sony games were also available for 19 PlayStation 4. So, I don't believe that they 20 had many games, if any. I think they had a 21 couple like Astro's Playroom or something 22 that required a PlayStation 5, but I think a 23 majority of their -- vast majority of their 24 portfolio was also available for owners of 25 PlayStation 4. 367 1 P. Spencer - Highly Confidential 2 Q. Okay. And that's called backwards 3 compatibility; is that right? 4 A. We would call that 5 cross-generational launch. You're launching 6 a game that's available on two generations or 7 multiple generations of consoles. 8 Q. All right. Let me put a finer 9 point on it then. 10 When PlayStation 5 launched, there 11 were a number of blockbuster titles that were 12 available on PlayStation console, but not 13 Xbox consoles? 14 A. There were a handful of games that 15 were available on PlayStation and not Xbox at 16 launch of Generation 9, yes. 17 Q. And do you remember any of those 18 titles' names? 19 A. There was a version of Demon's 20 Souls. There was a version of the Spiderman 21 game that -- where they had done an expansion 22 to the previous launched game that was 23 available around launch. As I said, there 24 was an Astro's Playroom that was available. 25 I'm sure I'm missing a couple. But in my 368 1 P. Spencer - Highly Confidential 2 head, yes, there were a few games that were 3 available for PlayStation and not Xbox at the 4 launch of this generation. 5 Q. Do you think that the availability 6 of games that were exclusive to PlayStation 7 consoles that skipped the Xbox Gen 9 console 8 hurt sales of the Xbox Gen 9 console it 9 launched? 10 A. At launch, our biggest constraint 11 on sales was actual availability of hardware. 12 Games skipping Xbox will negatively impact 13 console sales as we get to a point where we 14 have supply in channel of consoles. But at 15 launch, the thing that was constraining sales 16 was availability of hardware. 17 Q. And so, putting aside launch, I 18 hear you're saying over lifetime of console, 19 the blockbuster games being exclusive to 20 PlayStation 5 -- strike that, to PlayStation 21 consoles and not Xbox consoles would be 22 expected to have a negative effect on Xbox 23 console sales, correct? 24 A. Yes, there is a negative impact to 25 games skipping Xbox and only being available 369 1 P. Spencer - Highly Confidential 2 on PlayStation. 3 Q. And would the inverse also expected 4 to be true, that is, if there were a 5 blockbuster game that was Xbox console only, 6 would you expect that fact to have a negative 7 impact on PlayStation console sales? 8 A. From our data, the overall impact 9 on Xbox or PlayStation is fairly small for 10 launching exclusive games, and I believe 11 Sony's market position is strong enough that 12 us launching exclusive games is not really 13 negatively impacting their console sales, a 14 sign of that would be that they just raised 15 price on their console midway through the 16 generation, not seemingly fearing that 17 they're going to somehow be in a demand 18 constraint world. 19 Q. When was that price increase 20 announced? 21 A. Last month. 22 Q. So, it seems like you're saying 23 that the ability of -- let me put it this 24 way, strike that. 25 It seems like you're saying that's 370 1 P. Spencer - Highly Confidential 2 an asymmetry that if a game were to be 3 exclusive to Xbox console wouldn't have as 4 much of a negative impact on Sony PlayStation 5 game as the impact of a game being exclusive 6 to PlayStation console has on Xbox console; 7 is that right? 8 A. Yeah, I would start from the data 9 that we have seen from our work that the 10 impact to console sales or let's say, because 11 we're talking about negative impact and 12 positive impact, a share ship, like a ship 13 from one console to another console for a 14 customer, is fairly small with exclusive 15 games, and the position that Sony PlayStation 16 has in the market is much, I'd say, less 17 elastic, meaning their demand is pretty fixed 18 and strong, whether it's based on price or 19 availability of hit games on Xbox that are 20 not available on PlayStation. And you're 21 right, there's an asymmetry in the market 22 just given that we were a distant third place 23 in terms of market share of consoles. 24 Q. Can you tell us what the rough 25 quantification is when you say that you think 371 1 P. Spencer - Highly Confidential 2 that exclusives that are on console or the 3 other don't have that much of an impact on 4 console sales? 5 A. What we see in the data is there's 6 maybe 30-day window where sales might be 7 inflated for a console that has a hit game 8 that's not available on another console, but 9 the duration where it actually has an impact 10 is fairly short. So, maybe a couple hundred 11 thousand consoles globally are impacted when 12 an exclusive games come out for one platform 13 or another. And the -- 14 Q. Go ahead. 15 A. The duration is pretty short on the 16 impact it has in the market. 17 Q. What is your understanding then of 18 why Sony pursues exclusivity that skips Xbox 19 if it doesn't really impact share mix as 20 between the two -- the consoles? 21 A. So, the previous generation, 22 Generation 8, our brand name at that point 23 was Xbox One, there were markets where our 24 market share got low enough where Xbox was on 25 the verge of being de-assorted or not carried 372 1 P. Spencer - Highly Confidential 2 at retail. I do believe they have a strategy 3 that if they could push us down far enough 4 that we will exit the business. And knowing 5 that Microsoft has many businesses that 6 Microsoft could afford to exit the gaming 7 business. 8 So, what I've seen is their 9 strategy is to try to get us to exit the 10 gaming business. 11 Q. What markets are you referring to 12 when you say there were markets where the 13 share got so low there was a risk that Xbox 14 wouldn't be carried retail? 15 A. Yeah. In mainland European markets 16 of like Spain, Italy, Germany, there were 17 months where market -- Xbox's market share 18 was in the single digits, meaning sub ten 19 percent share. And as you can imagine, for a 20 retailer, just the kind of complexity of 21 carrying another console when one -- with 22 Switch and PlayStation doing well, that we 23 were at risk of being dropped from assortment 24 in some of the big retailers in southern 25 European markets. 373 1 P. Spencer - Highly Confidential 2 Q. Is it correct that the risk of 3 being dropped from a retailer was not a risk 4 that Xbox faced in the United States? 5 A. No. In the United States, our 6 market share has traditionally been more 7 competitive. 8 Q. And why was the market share so low 9 in some of these mainland European countries 10 that you believe Sony had a chance to push 11 Xbox out of retail altogether? 12 A. Sony's definitely done a good job 13 building a good brand and a good product. 14 So, I wouldn't want to take that away from 15 them. They do things like they have the 16 co-marketing on FIFA, which is the soccer 17 game, the football game. They sponsor 18 Champion League football, soccer in Europe. 19 They do a lot of work to be the, kind of, 20 default gaming brand, spend money to be the 21 default gaming brand in market, which makes 22 it, you know, difficult for a third place to 23 compete. So, they use content, they use 24 their marketing capability, and even I would 25 say their relationship with retailers to 374 1 P. Spencer - Highly Confidential 2 ensure that they have great placement for a 3 product that's in demand. 4 Q. And did Xbox get dropped from any 5 retailers in mainland Europe during the 6 period you're talking about? 7 A. I can't think of an explicit 8 retailer that did drop us, I just know it was 9 a conversation that we were having. It's not 10 a -- I don't manage directly the 11 relationships with all the retailers. But 12 our market share was sub ten percent in many 13 of those markets, and it was a real 14 discussion for us with our sales team of how 15 we remain relevant in those markets. 16 Q. What's the market share roughly in 17 those same countries now? 18 A. Many of them -- sorry, can you hear 19 me? 20 Q. I apologize, I interrupted you. 21 To tack on the end, is it still sub 22 ten percent? 23 A. No. This Xbox Series S and X, our 24 market share has increased in many of those 25 markets more in the 10 to 20 percent range, 375 1 P. Spencer - Highly Confidential 2 sometimes even over 20. 3 Q. And in your view, is PlayStation 4 still signing exclusive deals to skip Xbox 5 because it thinks it can -- well, because 6 there's a chance Xbox will be forced out of 7 the market? 8 A. They are still signing exclusive 9 third-party -- deals with third-parties to 10 exclude Xbox console from the shipping 11 portfolio. There are two games from Square 12 Enix expected to ship in the next year that 13 won't ship on Xbox. 14 Q. I guess my sense is -- go ahead, 15 please. 16 A. I'd say their goal for doing that, 17 I'm surmising based on kind of discussions 18 and what I hear, but obviously they're not 19 coming to me telling me explicitly why 20 they're signing those deals. 21 Q. Understood. Understood. 22 And for all of this, I'm looking 23 for your, you know, based on your knowledge, 24 your experience, your time leading Xbox 25 console, businesses and rest of Xbox. 376 1 P. Spencer - Highly Confidential 2 A. When I had a discussion with Jim 3 Ryan about Google Stadia, one of the comments 4 he made to me and I said, Google entering the 5 gaming sales and distribution is a real 6 market move that we should all be, you know, 7 aware of and watch. His statement to me was, 8 we're just gonna wait them out, and we think 9 they will lose attention over time and go 10 away. Turns out he was right. But he didn't 11 say that about Microsoft, but given the 12 similarities between Google and Microsoft in 13 some ways, I can see a similar approach at 14 Sony that at some point Microsoft will just 15 lose interest in this failing gaming venture 16 and do something else. 17 Q. Let me ask you two questions about 18 that; one is, you also predicted early on 19 that Stadia did not have a winning value 20 proposition or market staying power, correct? 21 A. I believe their launch -- yes, 22 their launch value proposition was off, was 23 not matching a consumer need. 24 Q. And so, your prediction was also 25 proven incorrect in that Stadia then did, in 377 1 P. Spencer - Highly Confidential 2 fact, exit and announce exit, right? 3 A. I didn't predict that they would 4 exit. I figured that they would evolve their 5 strategy and continue to refine their 6 product. I did not predict that they would 7 exit after four years or however long it's 8 been. 9 Q. And then the other question I have 10 is, you say that, you know, this conversation 11 with Mr. Ryan leads you to think that part of 12 Sony's strategy -- well, strike that. 13 Is it your view that Sony's 14 strategy is that eventually Microsoft might 15 tire and exit the gaming business? 16 A. I believe that's true. When I look 17 at growth for PlayStation given the business 18 model they have of selling a console and 19 having their business model resolve -- 20 revolve really only about that console's 21 growth, we are their biggest impediment to 22 growth, our continued investment in our Xbox 23 console. 24 So, it makes some logical sense for 25 them that in order to grow Sony's gaming 378 1 P. Spencer - Highly Confidential 2 business, which is so tied to or linked to 3 the success of PlayStation console, that 4 getting us out of the market is a path for 5 them to grow their gaming business. 6 Q. When you say "getting us out of the 7 market," do you mean Microsoft stops selling 8 a console or do you mean Microsoft exits 9 gaming? 10 A. When I just stated it I was more of 11 the latter. Clearly for Sony specifically, 12 us exiting the console business would be 13 enough for them to be able to realize their 14 success with their console business. So, 15 they might have less, I might've over -- I 16 may be over-claimed my strategic thesis for 17 them in saying that they would desire that we 18 completely exit the gaming business. They 19 would -- us exiting the console business 20 would benefit Sony pretty directly. 21 Q. Right. I think we talked earlier 22 some hours ago, if Microsoft is not in a 23 position, right, to exit the console business 24 until either subscription or cloud uptake is 25 sufficient to offset the loss from losing 379 1 P. Spencer - Highly Confidential 2 console business, correct, as a strategic 3 matter? 4 A. That's not -- that's not what I 5 said. 6 What I tried to share was we're 7 gonna get to a point before the launch of 8 a new generation, assuming we got to 9 Generation 10 launch, where we have not made 10 progress off of console that our strategic 11 thesis are -- are you there? I can't -- 12 Q. I'm here. 13 A. Okay. Our strategic thesis around 14 gaming has failed, and I believe that senior 15 leadership team at Microsoft, and I might 16 even advocate for it, would decide to exit 17 the business, not as an offset of revenue, I 18 mean, we're ten percent of Microsoft's 19 revenue, we're not a something that where the 20 company needs to backfill the gaming revenue 21 for Microsoft's benefit, it is more our 22 strategy, given their three billion people 23 who play video games, if we never get out 24 of this 200 million battle -- battle for the 25 200 million people who want to buy a gaming 380 1 P. Spencer - Highly Confidential 2 console, this isn't a business that Microsoft 3 should be in. 4 So, my point was not about a 5 replacement for the strategy, but rather 6 success on the strategy of meeting gamers 7 where they are. 8 Q. And when you say it's not a 9 business Microsoft should be in, do you mean 10 all of gaming, that Microsoft Gaming would 11 cease to be a business at Microsoft or just 12 console? 13 A. I would -- I mean all up 'cause 14 what I'm saying is, if you give us two or 15 three, four more years and we get to this 16 point where we haven't had success on PC in 17 that time frame and we haven't had success on 18 mobile, and I believe I was responding to 19 your question about what time frame do you 20 need to see success in PC and mobile, that if 21 we've seen basically no progress on those two 22 platforms, then I would say we're failing to 23 meet gamers' needs on console -- sorry, on 24 mobile, failing to meet gamers' needs on PC 25 and this console business we're a distant 381 1 P. Spencer - Highly Confidential 2 third place to two entrenched competitors 3 without any real dynamic to cause that market 4 to change, so I -- I would -- not trying to 5 play victim, but I would advocate that the 6 company should look to deploy the 10,000 7 people that work on Xbox now in something 8 where we thought we could actually make 9 progress. 10 Q. Have you ever estimated the cost of 11 the write-down to Microsoft if it shut 12 gaming? 13 A. I know what our -- well, I know 14 what our balance sheet looks like for gaming, 15 it's not -- it's not prohibitive for a 16 company like Microsoft. To be clear, when I 17 say shutdown, there are assets here. I think 18 you would sell Minecraft, you would sell 19 Halo. So, shutdown is maybe too apocalyptic 20 in my term. What I mean is Microsoft exiting 21 the gaming business. I do think there is 22 terminal value in the business here that 23 somebody would pay to at least buy parts of 24 it. 25 Q. And it's your view that Sony's 382 1 P. Spencer - Highly Confidential 2 moves in the marketplace are part of a 3 strategy to push Microsoft to exit the gaming 4 business? 5 A. Yes, yeah. I'm trying to think 6 of examples where they aren't aggressive 7 against -- well, more than aggressive, using 8 their place in the market, their leverage in 9 the market to make it prohibitively hard for 10 us to compete. 11 Q. So, given that thesis or view of 12 the world of competition between Microsoft 13 Gaming and Sony, why wouldn't Microsoft 14 Gaming pull all the levers available to it, 15 be hard with Sony, make sure that Sony feels 16 a dent in its share in revenue? 17 A. 'Cause Sony participates in a 200 18 million person TAM when there are three 19 billion people who play gaming, we continue 20 to not -- continue to not talk about the 21 largest gaming companies on the planet, which 22 are Tencent and NetEase, and companies that 23 are making real business out of gaming. And 24 so, for us, fighting a backward-looking 25 battle around people who only want to play 383 1 P. Spencer - Highly Confidential 2 one game -- play games that are only 3 available on one device on a device from one 4 manufacturer is just not where the industry 5 is today. The largest games on the planet 6 are playable across PlayStation and Xbox and 7 Switch and PC. 8 So, we're building towards a gaming 9 reality of today and where gaming is going. 10 I don't think it would make sense for 11 Microsoft to fight heavily for a 200 million 12 unit TAM console business. And while I'm 13 overstating again, which is why in this 14 discussion, this idea that Call of Duty is 15 gonna be used as a weapon against 16 PlayStation, as you've seen in our valuation, 17 there's no share shift anywhere from 18 PlayStation console to Xbox console. This is 19 really about our future in diversifying our 20 game content with mobile content, 21 free-to-play content that can be available to 22 gamers on any device. 23 Q. And the window for that future for 24 Microsoft to get out of the 200 million TAM 25 console and make real progress in the three 384 1 P. Spencer - Highly Confidential 2 billion TAM market for other kinds of gaming, 3 that's a three to four-year window from now? 4 A. At most. You and I just talked 5 about Game Pass being flat over the last nine 6 months in terms of subscribers. Our share is 7 relatively fixed in the console space, we're 8 making incremental progress on PC. As I 9 mentioned, we had our first billion dollar 10 revenue year. But us gaining relevance on 11 the largest platform for games, which are 12 mobile devices, it's just been imperative for 13 us. 14 Q. If it doesn't work out to gain 15 efficient share in mobile, would Microsoft 16 then have an incentive to start pulling some 17 of these levers to ensure that business can 18 survive in the 200 million TAM for console? 19 A. If you look at Microsoft as a 20 global business and its scale, the Sony 21 business inside of Microsoft is really no 22 more meaningful than the Xbox business, it's 23 not a -- the size of business that Microsoft 24 is pursuing with all of its resources. Our 25 pivot in this business is to constantly talk 385 1 P. Spencer - Highly Confidential 2 about three billion gamers, $200 billion in 3 revenue top line and our ability to be a 4 participant in that growth. I don't -- in 5 any world where we would not succeed on 6 mobile and PC and decide that we would go 7 backwards to a closed device flat TAM market 8 and invest our resources there, I would not 9 advocate for that. 10 Q. So, it's either -- I want to be 11 clear about this, in three to four years, 12 it's either that Microsoft succeeds -- 13 Microsoft Gaming succeeds in going to achieve 14 what you think it needs to achieve in the 15 vision for mobile and PC or said shutdown was 16 too draconian, but -- or what? 17 A. I'll call it divesting of what we 18 have. My view is if we don't succeed on 19 mobile, that it's really been caused by the 20 two mobile platform holders excluding us from 21 distributing our service. And we see that 22 today where Apple blocks us from launching on 23 their platform, through their store, I should 24 say, and Google really constrains our ability 25 to succeed. And how we're trying to counter 386 1 P. Spencer - Highly Confidential 2 that is to acquire some popular mobile 3 content to help us create some allure for 4 gamers that we can then use to have some 5 engagement on those platforms where we might 6 be able to use cloud and other distribution 7 to gain a foothold on those platforms. 8 Because if we don't gain a foothold on 9 mobile, there's really no future for us, in 10 Microsoft investment in gaming. 11 Q. Do you think that thesis that you 12 just expressed -- 13 THE COURT REPORTER: I'm sorry. 14 Can you say that again? 15 Q. Do you think that thesis that you 16 just expressed is understood in the 17 marketplace -- 18 A. No. 19 Q. -- about Microsoft Gaming? 20 A. No. No, in terms of -- in terms of 21 trying to drive excitement with our customers 22 and our developers and our partners, I try 23 not go out with the Phil doom and gloom 24 conversation about where we are. But I know 25 from the time I took this job, Satya, one of 387 1 P. Spencer - Highly Confidential 2 the first conversations I had with him is, he 3 wasn't sure why we're in the gaming business. 4 But at that point, in the Xbox One 5 generation, he said we clearly are -- we're 6 out of position with our product, so let's go 7 try to fix that and then decide what we 8 should go do. And we've made progress 9 through innovations like Xbox Cloud Gaming 10 and Game Pass and shipping our games on PC. 11 But we will reach the asymptote of where we 12 can make progress definitely on console, 13 we're probably already there. We will ship 14 probably half of the consoles that 15 PlayStation does this next year. And if we 16 don't, so we have to make progress in mobile. 17 But I don't go out with that on my kind of 18 gaming T-shirt when I'm doing PR. 19 Q. What's your view of the ZeniMax 20 acquisition then? As of 2020 when the deal 21 happened, one of the main strategic rationale 22 for ZeniMax was that it brought potential 23 content for Game Pass, right? 24 A. Yeah, the specific focus for 25 ZeniMax for us was really their PC heritage 388 1 P. Spencer - Highly Confidential 2 and helping us make progress on PC with their 3 portfolio, which as I said, we have made some 4 progress. 5 Q. Okay. Go ahead. 6 A. We -- Starfield has missed its 7 dates. COVID production issues have caused 8 us some delays, but we have made progress on 9 PC. But as you can imagine inside of 10 Microsoft talking about a billion dollar 11 business is not a -- we're not alone in 12 having billion dollar businesses, the scale 13 has to be much bigger than that. 14 Q. Do you think the ZeniMax deal was a 15 failure or a success for Microsoft, or too 16 soon to tell? 17 A. Too soon to tell. It closed just 18 18 months ago and we have missed our dates. 19 I'm excited about our two games that we will 20 be launching, Redfall and Starfield. As I 21 said a number of times, the two games we have 22 launch happened to be PlayStation exclusives. 23 But -- so I think it's too soon to tell. 24 Q. And given this internal view that 25 you've discussed with us about the future of 389 1 P. Spencer - Highly Confidential 2 Microsoft and what needs to happen in just 3 three or four years' time, it's quite a bet 4 of spending $70 billion for Activision, 5 wouldn't you say? 6 A. Last year, and you probably have 7 these documents, last year around this time 8 we were looking at Zinga, another mobile 9 publisher. We've known, and this was Amy 10 Hood and I -- we've known for over a year 11 that we're reaching the point where we need 12 to make progress on mobile and through King 13 and Call of Duty mobile and Diablo mobile, 14 Activision Blizzard King is the best mobile 15 publisher of content that's available to us, 16 and a big developer of mobile content. 17 So, I believe it's a big bold bet, 18 and I appreciate the support from the company 19 and the board in going to do this, but you're 20 absolutely right, it's a big bold bet. 21 MS. WINKINSON: James, I think we 22 should stop. We're getting tired here 23 and you must be getting exhausted. 24 MR. WEINGARTEN: Don't blame me. 25 MS. WINKINSON: I'm not blaming 390 1 P. Spencer - Highly Confidential 2 you. 3 MR. WEINGARTEN: Let's go off the 4 record. 5 THE COURT REPORTER: We're off the 6 record. 7 (Off-the-record discussion was 8 held.) 9 THE COURT REPORTER: We're back on 10 the record. 11 MR. WEINGARTEN: Okay, we're gonna 12 pause for now. We're gonna continue 13 the testimony at 11 a.m. East Coast 14 Time tomorrow. I definitely, while 15 we're on the record, want to thank 16 Mr. Spencer for his time today. 17 So we'll see you at 11 tomorrow, 18 8 a.m. Pacific. We can go off the 19 record. 20 THE COURT REPORTER: We're off the 21 record. 22 (Time noted: 10:30 p.m. Eastern Time) 23 24 25 391 P. Spencer - Highly Confidential 1 2 J U R A T 3 4 5 I, PHIL SPENCER, do hereby certify 6 under penalty of perjury that I have 7 read the foregoing transcript taken on 8 OCTOBER 11, 2022; that I have made 9 such corrections as appear noted 10 herein in ink, initialed by me; that 11 my testimony as contained herein, as 12 corrected, is true and correct. 13 14 ________________________ 15 PHIL SPENCER 16 17 Subscribed and sworn to before me 18 This _______ day of __________, 20__. 19 20 ____________________________________ NOTARY PUBLIC 21 22 23 24 25 392 1 P. Spencer - Highly Confidential 2 ------------------I N D E X------------------ 3 WITNESS: PHIL SPENCER 4 EXAMINATION BY PAGE 5 MR. WEINGARTEN 5 6 7 ----------------E X H I B I T S-------------- 8 9 NUMBER DESCRIPTION PAGE 10 Exhibit PX1063 E-mail chain, Bates 49 11 MSFT-2R-03228566 12 Exhibit PX1065 E-mail chain with 91 attachment, Bates 13 MSFT-2R-05727022 14 Exhibit PX1245 E-mail chain with 112 attachment, Bates 15 MSFT-2R-03620309 16 Exhibit PX1514 E-mail chain, Bates 129 MSFT-2R-03733004 17 Exhibit PX1114 Gaming CSA-SLT 157 18 Strategy Review 2205-vFinal, Bates 19 MSFT-2R-09343940 20 Exhibit PX1208 E-mail chain, Bates 172 MSFT-2R-09635948 21 Exhibit PX1275 E-mail chain, Bates 181 22 MSFT-2R-03620210 23 (Exhibits continued on next page.) 24 25 393 1 P. Spencer - Highly Confidential 2 (Exhibits continued.) 3 Exhibit PX1517 Roadmap to 2030 GLT 184 4 Pre-Read 04-29-22, Bates 5 MSFT-2R-07683508 6 Exhibit PX1145 E-mail chain, Bates 189 MSFT-2R-01810109 7 Exhibit PX1288 E-mail chain, Bates 211 8 MSFT-2R-02824226 9 Exhibit PX1022 E-mail chain with 215 attachment, Bates 10 MSFT-2R-08197569 11 Exhibit PX1050 E-mail chain with 226 attachment, Bates 12 MSFT-2R-04769774 13 Exhibit PX1157 E-mail chain, Bates 238 MSFT-2R-06665108 14 Exhibit PX1062 E-mail chain, Bates 243 15 MSFT-2R-01742378 16 Exhibit PX1510 E-mail chain with 265 attachment, Bates 17 MSFT-2R-08189182 18 Exhibit PX1110 E-mail with 287 attachment, Bates 19 MSFT-2R-03052561 20 Exhibit PX1111 E-mail chain with 320 attachment, Bates 21 MSFT-2R-03087430 22 Exhibit PX1060 E-mail chain, Bates 347 MSFT-2R-00657795 23 Exhibit PX1052 E-mail chain, Bates 351 24 MSFT-2R-07498463 25 394 P. Spencer - Highly Confidential 1 C E R T I F I C A T E 2 3 STATE OF NEW YORK ) : SS.: 4 COUNTY OF RICHMOND ) 5 6 I, CANDIDA BORRIELLO, a Notary 7 Public for and within the State of New York, 8 do hereby certify: 9 That the witness, PHIL SPENCER, 10 whose examination is hereinbefore set forth 11 was duly sworn and that such examination is a 12 true record of the testimony given by that 13 witness. 14 I further certify that I am not 15 related to any of the parties to this action 16 by blood or by marriage and that I am in no 17 way interested in the outcome of this matter. 18 IN WITNESS WHEREOF, I have hereunto 19 set my hand this 12th day of October, 2022. 20 21 __________________________ CANDIDA BORRIELLO 22 23 24 25 395 P. Spencer - Highly Confidential 1 ERRATA SHEET FOR THE TRANSCRIPT OF: 2 Case Name: MICROSOFT/ACTIVISION INVESTIGATIONAL HEARING 3 Dep. Date: OCTOBER 11, 2022 Deponent: PHIL SPENCER 4 Pg. Ln. Now Reads Should Read Reason 5 ___ ___ ______________ _______________ _____ 6 ___ ___ ______________ _______________ _____ 7 ___ ___ ______________ _______________ _____ 8 ___ ___ ______________ _______________ _____ 9 ___ ___ ______________ _______________ _____ 10 ___ ___ ______________ _______________ _____ 11 ___ ___ ______________ _______________ _____ 12 ___ ___ ______________ _______________ _____ 13 ___ ___ ______________ _______________ _____ 14 ___ ___ ______________ _______________ _____ 15 ___ ___ ______________ _______________ _____ 16 ___ ___ ______________ _______________ _____ 17 ___ ___ ______________ _______________ _____ 18 ___ ___ ______________ _______________ _____ 19 ________________________ PHIL SPENCER 20 SUBSCRIBED AND SWORN BEFORE ME, 21 This___ day of_____________, 20__. 22 __________________________________ 23 Notary Public 24 My Commission Expires:__________ 25