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Dennis Carlton (Microsoft's Expert Witness) rebuttal of Dr Robin Lee's statements (FTC's Expert Witness) is now public!
He didn't seem to do so great on the stand but that is because FTC spent their entire cross examination trying to discredit him so were asking him a bunch of questions unrelated to his testimony. However, as we can see from his actual testimony which Judge Corley reads in private, he appears to have been well worth the money, his whole purpose was to provide a rebuttal to Robin Lee's analysis of the market and he seems to have achieved that.
This whole response is just a complete put down of Robin Lee's analysis, here are some parts singled out by others.
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Prof. Lee's claims of total foreclosure are not supported by his separate foreclosure model. A key assumption in his foreclosure model—that 20% of single-homing PlayStation users who play Call of Duty would buy an Xbox if Call of Duty were withheld from PlayStation, known as the "Xbox conversion rate"—is not supported by his demand model or by other evidence he cites. Correcting this one problem in his foreclosure model reverses his conclusion that foreclosure would be profitable to Microsoft.
Second, Prof. Lee assumes that every lost PlayStation 4 sale results in an additional Xbox One sale, ignoring the fact that consumers may choose to purchase something other than the Xbox One in the event of foreclosure (i.e., they may choose the "outside good," such as Nintendo, PC, or simply not playing games at all, in Prof. Lee's demand model). This assumption is particularly problematic because Activision content could be played on platforms other than PlayStation and Xbox post transaction and thus PlayStation users who want to access Call of Duty after foreclosure have options other than purchasing an Xbox. I refer to this as the Outside Good Error.
32. Prof. Lee's predicted change in Xbox One sales from his demand model depends critically on the assumption that, if Call of Duty were withheld from PlayStation 4, every consumer who would leave the PlayStation 4 would go only to the Xbox One. This assumption is flawed, however, and causes Prof. Lee to greatly overstate the predicted change in the sales of Xbox One. It is the change in Xbox sales, not the change in Xbox's share of Xbox plus PlayStation sales, that matters to an analysis of foreclosure.
33. Similar to the Non-Exclusive Games Error, Prof. Lee's assumption regarding the outside good is inconsistent with his demand model that explicitly allows consumers to choose the outside good. As initially described, Prof. Lee's model contemplates that if Call of Duty were removed from PlayStation, consumers who would have chosen to purchase a PlayStation had Call of Duty been available on the platform have three choices: (1) they can still choose to purchase a PlayStation, despite the absence of Call of Duty; (2) they can purchase an Xbox; or (3) they can do something else—multihome or purchase a different console (such as Nintendo), a gaming PC, or nothing at all. This third option of substituting to the "outside good" is critical for correctly answering the question of whether it would be profitable for Microsoft to withhold Call of Duty from Sony. But Prof. Lee fails to account for it in his demand model, even though his own academic research on consumer demand for consoles shows that diversion to the outside good is significant.
34. Prof. Lee's assumption that no consumers would switch to the outside good leads his demand model to overstate the predicted increase in Xbox One sales if Call of Duty is withheld from the PlayStation 4. To see why this is the case, consider the extreme example where diversion to the outside good is 100%, that is, every consumer who chooses not to purchase a PlayStation 4 due to Call of Duty being unavailable chooses not to purchase an Xbox One.
Clearly, in this scenario, one should predict no increase in the number of Xbox Ones sold. Because Prof. Lee looks only at the change in relative share of the Xbox One and PlayStation 4 (ignoring the outside good), however, he would falsely predict an increase in the number of Xbox Ones sold. The manner in which Prof. Lee estimates his model precludes him from ruling out this possibility and instead imposes an equally extreme assumption on the other end of the spectrum: that diversion to the outside good is 0%.
35. Correcting Prof. Lee's error in excluding non-exclusive software from his demand model and his error in not accounting for diversion to the outside good leads to a substantially lower predicted effect on Xbox sales in the event Microsoft were to withhold Call of Duty from PlayStation. After these corrections, Prof. Lee's own model would show an estimated increase in Xbox One sales that is between [redacted] of what Prof. Lee's demand model predicts.
36. Alternative specifications of Prof. Lee's model predict even smaller effects on Xbox sales. I estimated a model that is identical to Prof. Lee's demand model, except that it corrects the two errors described above and is more general—specifically, I allowed for the possibility that the relationship between the software on a console and the share of console sales vary seasonally. I find that this model fits the data better than does Prof. Lee's according to the very criterion that Prof. Lee uses to choose among the multiple versions of his model that he estimates. This model shows an estimated increase in Xbox One sales that is between [redacted] of what Prof. Lee's demand model predicts.
37. Prof. Lee's testimony cites to his demand model as evidence that his foreclosure model, with his assumed 20% Xbox conversion rate, produces conservative results. My analysis has shown that it is not conservative compared to a corrected version of his demand model and that the increase in Xbox sales from his total foreclosure model are much larger than what he would predict from his demand model, and thus there is no support from his demand model to justify his assumption in his foreclosure model.
Prof. Lee's analysis ignores that firms he claims will be totally foreclosed either have protected themselves against foreclosure or, in the case of Sony, could protect itself based on the offer made by Microsoft.
49. Prof Lee fails to properly account for lost sales on non-foreclosed Microsoft and Activision games.
Suppose, for example, that Call of Duty 2025 were to be foreclosed from PlayStation, and, as a result, a user purchases an Xbox to play Call of Duty 2025 and switches to using Xbox as his primary gaming device. That user will no longer purchase future Call of Duty releases on PlayStation, absent the foreclosure of Call of Duty 2025. Prof. Lee’s foreclosure model ignores Microsoft/Activision’s lost sales of games other than Call of Duty 2025 on PlayStation that result from PlayStation’s users purchasing an Xbox after foreclosure of Call of Duty 2025. In contrast, Prof. Lee’s benefit calculations account for all expected Microsoft/Activision profits on this user, including profits on future Microsoft/Activision releases. […]
52. Prof. Lee's analysis does not account for the commitments Microsoft has made regarding Call of Duty. Prof. Lee dismisses the existing contracts and contractual offers Microsoft has made to console manufacturers and cloud gaming services that eliminate its ability to totally foreclose Call of Duty from those platforms. He opines that any agreement with Microsoft could not eliminate the possibility of foreclosure since Microsoft "would have an economic incentive to deviate from" the agreements. Even assuming that is true, which I do not agree with, a firms' reputations and, if needed, court proceedings, create incentives to rely on contracts. To assume that contracts cannot effectuate transactions is an extreme assumption, especially when the contractual terms are similar to—or better than—those of contracts that already exist, as I understand is the case here.
53. Prof. Lee ignores Microsoft's offer to Sony altogether. It is peculiar to claim that Sony's consoles will be foreclosed from effective competition by Xbox withholding Call of Duty when Sony refuses to sign a contract that Microsoft offered to guarantee PlayStation access to Call of Duty—an offer that includes a ten-year term. As an economic matter, that behavior is an indication that Sony is more concerned about preventing Xbox from becoming a more potent competitor (or using the regulatory review process to extract even more favorable terms for the distribution of Activision content) than it is with the possible loss of access to Call of Duty.
54. With respect to content library and cloud gaming services, Prof. Lee's claim that they will be foreclosed compared to the but-for world with no transaction assumes a but-for world that is contradicted by the evidence. Namely, Prof. Lee assumes that Activision would agree to allow its content, including current versions of Call of Duty, to become part of a third party's content library or cloud gaming offering in the future. As such, Prof. Lee's claim does not reflect the expressed and consistent business strategy Activision has pursued and has stated it would continue to pursue in the absence of the merger.
Last edited by Ryuu96 - on 05 July 2023
