Editor’s note: This article is part of Day 1 (June 22, 2023) of the FTC vs. Microsoft and Activision Blizzard trial.

Microsoft has officially acknowledged that its Xbox console has consistently lagged behind its rivals in the ongoing “console wars.” The report came as part of Microsoft’s proposing findings of fact, submitted on the first day of its legal battle with the Federal Trade Commission (FTC) over the proposed $68.7 billion acquisition of Activision Blizzard. This contentious move has raised eyebrows in the gaming industry and intensified the scrutiny surrounding the deal.

The document submitted by Microsoft highlights its entry into the gaming arena in 2001 with the launch of the original Xbox console. From the outset, the Xbox faced formidable competition from Sony‘s PlayStation and Nintendo‘s gaming systems. According to Microsoft’s own data, the Xbox trailed significantly behind its competitors in terms of sales, with Sony and Nintendo consistently outpacing Microsoft’s console.

Quoting the report, “Xbox’s console has consistently ranked third (of three) behind PlayStation and Nintendo in sales. In 2021, Xbox had a share of 16% while Nintendo and PlayStation had shares of [redacted] and [redacted], respectively. Likewise for console revenues and share of consoles currently in use by gamers (‘installed base’), Xbox trails with 21% while PlayStation and Nintendo have shares of [redacted] and [redacted], respectively.”

Microsoft candidly admits its past struggles to gain market share and asserts that it has adopted a different approach to compensate for this setback. Rather than focusing solely on console sales, the tech giant has chosen to prioritize generating profits through game sales. To this end, Microsoft has been selling its consoles at a loss, effectively subsidizing gamers’ hardware purchases in the hopes of recouping the revenue through game and accessory sales.

These arguments form a critical part of Microsoft’s defense against the FTC’s attempt to halt the acquisition with a preliminary injunction. The FTC’s concerns revolve around the potential for Microsoft to dominate the games market, particularly by making popular titles such as Call of Duty exclusive to the Xbox platform. However, Microsoft vehemently denies any intention to limit game availability to its console alone.

Microsoft’s primary argument in favor of the acquisition is rooted in its third-place position in the console market. The company asserts that the merger with Activision Blizzard is crucial to solidify its standing as a viable competitor against industry leaders Sony and Nintendo. By joining forces with one of the largest game publishers in the world, Microsoft aims to enhance its gaming portfolio and gain a stronger foothold in the highly competitive market.

The legal battle between Microsoft and the FTC has far-reaching implications for both the gaming industry and the future of console wars. If the preliminary injunction is granted, it would temporarily halt the merger until an evidentiary hearing takes place on August 2. Notably, this date falls after the anticipated closing date for the deal on July 18, 2023. Consequently, the parties involved may be compelled to renegotiate the terms of the merger, adding further complexity to an already contentious situation.

As Microsoft and the FTC square off in court, the outcome of this battle will have a profound impact on the gaming landscape. It remains to be seen whether Microsoft’s admission of losing the console wars will lend credibility to its arguments or serve as a detriment in the eyes of the court. In any case, the $69 billion Activision Blizzard buyout hangs in the balance, poised to reshape the gaming industry and redefine the dynamics of competition among major players in the years to come.