Platform divergence and geographic divergence after Microsoft/Activision and Apple v CMA

Mobile gaming is in the regulatory spotlight

In January 2022, we first reported on the CMA’s concerns that Apple had been blocking cloud gaming apps on the App Store (Google does allow those apps on Play Store but does not allow in-app purchases to be completed within cloud gaming apps). The CMA referred this issue to a full market investigation on 22 November 2022, but Apple successfully appealed that decision at the Competition Appeal Tribunal (CAT). The CMA was granted permission to appeal the CAT’s judgment to the Court of Appeal, which will likely be heard in the Autumn.

Meanwhile, cloud gaming also played a major role in the competition scrutiny of Microsoft’s acquisition of Activision Blizzard, with the European Commission clearing the deal subject to a 10-year commitment from Microsoft to provide access to Activision games on rival cloud gaming services. In the UK, meanwhile, the deal was initially blocked outright, but then given provisional clearance when Microsoft re-filed a “new” deal that would involve Microsoft not acquiring cloud gaming rights to Activision games outside the EEA for another 15 years, during which Ubisoft would exploit those rights.

As the dust settles, it is time to take stock on the state of play for this new form of game distribution, which became an unexpected lightning rod in two major 2023 competition developments.

Apple’s restrictions remain

A quick check of the App Store guidelines confirms that Apple continues to block cloud gaming services’ apps on the App Store. Damien and I wrote extensively about these issues in the Interactive Entertainment Law Review (see here (paywall)). In short, Apple requires that each game must be individually submitted to the App Store, which means each game must be individually downloaded to the user’s device as an app. Apple claims this is required for reasons of security and privacy, but its insistence on having separate apps for each game means that the main benefit of a cloud gaming app becomes unavailable to users, namely the access, within one single cloud gaming provider’s app, to a catalogue of games which can all be played in that app, without having to download each game as an individual app. The App Store Guidelines also state that games “must use in-app purchase to unlock features or functionality, etc.” Therefore, streaming of games does not benefit from the exemption from the obligation to use Apple’s in-app purchasing (IAP) system which applies to streaming of video and music. 

The restrictions matter, because on mobile devices, cloud gaming could function as a new distribution model for mobile games that could rival the App Store as the dominant platform for mobile game distribution on iOS. Why? Because the App Store relies on the concept that each game needs to have its own app, allowing the app stores to extract a commission of up to 30% on each paid-for download of a game, each subscription concluded within the app, and each in-game purchase made. For context: Electronic Arts, a game publisher, now makes 70% of its revenues from in-game “services” and only 30% from game sales. For many mobile game developers, the ratio is even more skewed towards in-game services. Apple is the biggest beneficiary of this, taking home USD 15.3 billion in games revenue in 2021, beating Microsoft, Nintendo and Activision Blizzard despite not making any games itself.

If a cloud gaming service app can be downloaded onto an iOS device, this means the user would have access to multiple games through a single app. It also means game studios have an alternative means of distributing their games to the App Store. In turn, this will exert competitive pressure on Apple, because game studios will interact with both the App Store and the cloud gaming service and may threaten to de-list their games from the App Store if cloud gaming services become a credible distribution channel on mobile. Mobile gamers may at the same time be less locked-in to the existing mobile ecosystems, because they will not need to go through the App Store or Play Store to access games.

There is therefore significant pro-competitive potential in cloud gaming on mobile. The big question is, what are regulators doing about Apple’s restrictions that hamper this potential? The CMA appears to have gone quiet over the issue while it awaits a date for its appeal against the CAT’s decision to quash its market investigation reference to be heard.

That appeal may be overtaken by events if the DMCC Bill is passed into law, which will give the CMA an opportunity to designate Apple as an SMS firm in relation to its App Store and iOS operating system, a decision that by now seems all but inevitable. If Apple is designated, the CMA will be able to impose conduct requirements on it, which could include general obligations on Apple not to discriminate between different types of app, not to block the installation of rival app stores, not to tie the App Store to its payment services, not to block the direct downloading (sideloading) of apps, and not to hamper the development of web apps. Depending on the way such obligations are drafted, they could amount to obligations for Apple no longer to restrict cloud gaming services’ apps on iOS. It is also possible that the CMA adopts a specific conduct requirement with respect to cloud gaming apps. The designation decision and the adoption of conduct requirements can be appealed by Apple.

Anyone waiting for change in the UK will therefore need to wait for the DMCC Bill to be passed into law and possibly also for any appeals to run their course. Still, provided the legislation is passed quickly, this will be faster than waiting for a Court of Appeal judgment and – if that judgment overturns the CAT (not a foregone conclusion) – restarting the market investigation and potentially imposing remedies at the end of it.

Approach under the DMA

In the EU, meanwhile, Apple has been designated under the Digital Markets Act (DMA) as a gatekeeper with respect to its App Store and iOS operating system, and Google with respect to its Play Store and Android operating system. The companies now have six months (starting from 6 September) to comply with the obligations under the DMA. The obligations relevant to cloud gaming are in Articles 6(4) and 6(12) of the DMA.

Article 6(4) of the DMA holds, essentially, that a gatekeeper can no longer prevent the installation of apps or alternative app stores and must also allow apps and alternative app stores to be sideloaded rather than accessed through the relevant core platform service. Therefore, alternative app stores will – at least in theory – become available, and those alternative app stores can give access to a cloud gaming app. A cloud gaming app can also be made available directly on the website of the cloud gaming service provider for sideloading on the relevant mobile device.

Under Article 6(12) of the DMA, the gatekeeper must apply conditions of access to its app store that are fair, reasonable and non-discriminatory. The corresponding Recital (62) of the DMA sets out some factors that can be considered in determining what conditions “would be unfair or lead to unjustified differentiation”. For example, Recital (62) sets out that access conditions should be considered unfair, among others, “if they lead to an imbalance of rights and obligations imposed on business users or confer an advantage on the gatekeeper which is disproportionate to the service provided by the gatekeeper to business users or lead to a disadvantage for business users in providing the same or similar services as the gatekeeper.”

There is not much guidance yet as to how “the imbalance of rights and obligations” or the disproportionate character of an advantage to the gatekeeper will be assessed in practice. However, Recital (62) also holds that among the “benchmarks [that] can serve as a yardstick to determine the fairness of general access conditions” are “conditions imposed for the same or similar services by other providers of software application stores.” The approach taken by Apple with regards to cloud gaming services differs from the approach taken by other app stores: for example, these can be offered as a fully functioning native app on the Samsung Galaxy Store and as a consumption-only native app the Google Play Store. This calls into question whether Apple’s conditions are fair and reasonable.

In addition, “conditions imposed by the provider of the software application store for different related or similar services” is another factor that can be used as a yardstick to judge the unfairness of access conditions according to Recital (62). Although the interpretation of “similar” services is not clear, cloud gaming services could argue that they are similar to other types of streaming subscription services which are allowed on iOS as native apps, e.g., Netflix and Spotify, which would make the different treatment between these two types of services by Apple unfair.

It is now for Apple (and Google) to publish and apply general conditions of access that are fair, reasonable and non-discriminatory. If these conditions of access do not deliver meaningful change for cloud gaming services, they will have the possibility of complaining to the Commission, complaining to a national competition authority, and launching a private action in the national courts.

Microsoft – Immediate changes to the playing field

Although Microsoft has also been designated as a gatekeeper, this relates only to its LinkedIn social network and its Windows operating system which does not block cloud gaming. The DMA therefore is not currently relevant to Microsoft’s approach to cloud gaming. However, the company’s efforts to obtain clearance for its acquisition of Activision Blizzard will mean that regulatory obligations will apply to Microsoft in relation to cloud gaming, in particular with respect to the distribution of PC and console games via cloud game streaming. 

This is because both the European Commission and the UK’s CMA identified competition concerns in relation to the distribution of those games via cloud gaming services. However, each agency has taken a different approach to resolving those concerns.

In the EEA (the EU + Norway, Iceland and Liechtenstein), Microsoft will be complying with comprehensive licensing commitments for a period of 10 years. These will involve:

  • A free licence to consumers in the EEA allowing them to stream, via any cloud game streaming service of their choice, all current and future Activision Blizzard PC and console games for which they have a licence, and
  • A corresponding free licence to cloud gaming services to allow EEA-based gamers to stream any Activision Blizzard’s PC and console games on the relevant cloud gaming service.

In other words: Microsoft is required to make Activision Blizzard games accessible on rival cloud gaming services active in the EEA, at least to those users who have a licence to play the games (either because they bought a game or because they have access to it as part of a multi-game subscription service). The upshot is that if a gamer buys, for instance, Call of Duty, they should be able to stream Call of Duty on Nvidia’s cloud gaming service GeForce One (leaving aside whether that is technically desirable taking into account potential latency issues). Similarly, if the gamer subscribes to any multi-game subscription service that includes Activision games, they can stream those games on rival cloud game streaming services.

Outside the EEA, the situation will be different as a result of the CMA’s intervention. The agency had originally blocked the deal and Microsoft had filed an appeal against that decision. Pending the appeal, the CMA allowed Microsoft to re-file a “new deal” under which Microsoft would not acquire the cloud streaming rights to all current and future Activision Blizzard PC and console games released during the next 15 years (excluding in the EEA). Instead, these “non-EEA cloud streaming rights” will be licensed to Ubisoft, which will be able to supply Activision’s PC and console games to all cloud gaming service providers (including to Microsoft itself). Ubisoft will also receive a non-exclusive licence to sell, distribute and sublicence the streaming rights to Activision games within the EEA.

Therefore, any cloud gaming service that wants to offer Activision games on a global basis can go to Ubisoft (though note that the CMA also allows the licencing agreements that Microsoft had already entered into, e.g. with Nvidia, to continue). While Microsoft will in the EEA be required to allow other cloud gaming services to offer access to Activision games, the situation outside of the EEA will be that this is a decision for Ubisoft to take. In the CMA’s view, this is preferable because it leaves “those important rights in the hands of an independent third party (with the freedom to deploy those assets as it wishes)” (see 22 September decision that undertakings may be accepted).

Platform divergence and geographic divergence

Viewed next to each other, these developments point to a divergence between mobile on one hand, and PC and console games on the other. On mobile, the current situation is that Apple’s restrictions remain, and that the Microsoft commitments do not apply: there is no obligation on Microsoft to make a mobile version of Activision games available to rival cloud gaming services. On console and PC, on the other hand, the Apple restrictions are irrelevant and cloud gaming services will gain access to Activision games under the commitments or under a new deal with Ubisoft.

That is a strange outcome if the idea of cloud gaming is to make gaming “platform agnostic”. The regulatory position, viewed today, is evidently not platform agnostic. That is understandable given that there appears not to have been a merger-specific concern around mobile games (perhaps in part because the Apple restrictions have stopped the emergence of mobile-OS cloud gaming experiences). If there is no merger-specific concern, then there is also no duty to impose or agree any remedies in the context of the merger.

This does, however, put into sharp focus the need to start prioritising the restrictions that currently exist within Apple’s, and to a lesser extent Google’s, mobile ecosystems. It makes little sense that the playing field should be levelled for console and PC games, but remain hopelessly skewed for mobile. The procompetitive potential of cloud gaming cannot be fully realised until restrictions on mobile are lifted.

In addition to this platform-based divergence, there will also be divergence between the EEA and the rest of the world. First, the EU commitments create a situation where Microsoft will be the licensor for cloud gaming services offered to EEA-based users, and strict commitments will apply directly to it, whereas the UK merger control intervention will mean that Ubisoft can act as a global licensor, and the company will not itself be bound by any regulatory requirements in this respect (though it will be bound indirectly through its contract with Microsoft).

Second, the restrictions applied by Apple and Google are most likely to come to an end soonest within the EEA, assuming the companies change their app store rules when they have to start complying with the DMA in 6 months’ time. Outside the EEA, there is a possibility that the CMA will take action under the DMCC Bill, but this lies further ahead in the future and is still uncertain. There is also the Epic Games litigation against Apple and Google ongoing in multiple jurisdictions on these issues, which may produce some remedies with respect to the App Store and Play Store from which cloud gaming services may benefit.

It is therefore likely that, at least for some time, the rules for cloud gaming will differ between the EEA and the rest of the world on both console and PC games and mobile games.

27.09.23 – Edits made to reflect that Ubisoft will also obtain a non-exclusive licence for the EEA.

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