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CMA probe into cloud gaming marks the start of increased antitrust scrutiny in gaming | Opinion

Geradin Partners' competition lawyers Stijn Huijts and Tom Smith on why the investigation could reshape the industry

The UK's Competition and Markets Authority (CMA) announced on June 10 that it is planning to carry out a market investigation into mobile browsers and cloud gaming.

This is big news because CMA market investigations can reshape whole industries. CMA interventions have for example led to London's three main airports, which were all owned by the same company, being split up so that the different London airports now compete with each other.

With respect to cloud gaming, the CMA found that Apple does not allow cloud gaming services like Nvidia's GeForce Now or Microsoft's Xbox Game Pass Ultimate to develop apps through which users can access each service's cloud gaming catalogue. Instead, Apple requires that each game is individually submitted to the App Store for Apple's approval. It also means each game has to be individually downloaded to the user's device, and users can't stream multiple games from one single app.

This is big news because CMA market investigations can reshape whole industries

Cloud gaming has lots of advantages. For game developers, it removes the need to develop different versions of their games across operating systems. Developers only need to code a game once and have it available on all platforms. It also allows them to design a seamless experience of their games across operating systems and to reach a larger base of users without porting to multiple operating systems.

For gamers, cloud gaming makes it possible to use a cloud gaming service at home, seamlessly keep playing on their mobile device on the move, and continue when returning home again.

Apple's restrictions make this impossible for iPhone users, unless they use a web-based app. Those apps however have downsides that mean that gamers get a lower-quality service. Of course, some of those downsides are also caused by Apple itself -- for example, Apple's WebKit browser engine, which all web browsers have to use on iOS, materially restricts the functionality of web apps.

Apple claims that its policies around cloud gaming are justified on the grounds of security and privacy, as well as user experience and expectations. However, the CMA is not persuaded that these are a compelling justification for its restrictions on cloud gaming apps. It labels Apple's arguments on these issues as "overstated" and says that some of its security measures are "not necessary."

It is likely that the CMA's intervention in this area will be impactful. The CMA has been lobbying the UK Government for a specific set of rules to deal with market failures in digital markets, similar to the Digital Markets Act (DMA) in Europe. The Government has however delayed the introduction of these rules, which has taken the CMA aback. The CMA has been vocal about its plans to intervene strongly in digital markets to make amends for the Government's delay. This investigation into cloud gaming must be seen in that context.

If the CMA's concerns about Apple's restrictions are borne out, it can be expected to impose strict remedies on Apple, which may even apply worldwide

If the CMA's concerns about Apple's restrictions are borne out, it can be expected to impose strict remedies on Apple, which may even apply worldwide. That would be a positive development for the games industry and for cloud gaming in particular, since it would ensure that cloud games can be played on all devices as intended.

The market investigation should be seen in the broader context in which the games industry is coming into the competition law (also known as antitrust law) spotlight.

There are, of course, already some developments in this area, including the Epic Games litigation against Apple, which included Apple banning Fortnite from the App Store. That case is however very much a part of the cluster of cases focussing on Apple's and Google's dominant position with respect to each of their own app stores, which are not restricted to games.

More interesting perhaps are the case against Valve in the US, and the competition investigations in relation to Microsoft's acquisition of Activision, because -- unlike the Epic case where Epic complains about practices that affect developers outside the games industry -- these cases are specifically about business models prevalent in the games industry. The Activision acquisition also revolves around the importance of gaming for large platforms' broader strategies.

In the Valve case, a US District Court recently refused to dismiss claims by Wolfire Games stating that Valve imposes so-called wide most favoured nation (MFN) clauses on game publishers on its popular PC game store, Steam, and that game developers are charged excessive commission fees charged on the Steam store.

Increased attention for gaming will bring both benefits and risks for games businesses

Interestingly, that commission is at the same level (30%) as the level of commission charged by Apple on in-app purchases in games, and which Epic Games is challenging in its lawsuit against Apple (and multiple authorities have ongoing antitrust investigations into these practices).

Wolfire Games stated that Valve is able to generate approximately $2 billion annually from Steam commissions purely due to its intermediary position between game publishers and gamers. According to the lawsuit, the wide MFN clauses prevent game publishers from offering lower prices on rival stores, further entrenching Steam's market position.

Competition agencies are no strangers to wide MFN clauses, having enforced against them in cases involving hotel booking sites like Expedia and price comparator sites like Comparethemarket.com. When a platform insists on using wide MFNs, this means that suppliers of the product or service sold on the platform (whether that is hotel rooms or games) cannot charge a lower price for their product or service when it is sold on another platform. This reduces competition because it hinders retailers' ability to cut prices.

Where the platform also charges a high commission rate like Valve does, a wide MFN may also mean that other platforms cannot compete with the most popular platform by charging lower commission rates, since the suppliers using the competing platform will be unable to pass on those lower commission rates to consumers. The competing platform will therefore not look particularly attractive to consumers, since prices will be similar to those charged at the incumbent platform. This reduces the scope for competition to bring down commission rates.

Microsoft meanwhile is preparing for an almighty battle to convince regulators in 17 different countries that its $70 billion acquisition of Activision should be cleared.

As the antitrust watchdogs turn their gaze to gaming, it is more important than ever to recognise these risks and opportunities

Microsoft and Activision are not currently each other's direct competitors. Why would regulators nonetheless take a close look at this acquisition? The answer is known to competition practitioners as a "vertical theory of harm", ie the concern that after acquiring Activision, Microsoft will have the ability and incentive to stop other game platforms from accessing the Activision game library (and particularly the Call of Duty games).

Microsoft has been at pains to explain that this is not its strategy and that Activision games will remain available on PlayStation, for instance. Whether competition authorities will go on trust or will want legally binding commitments from Microsoft remains to be seen.

Increased attention for gaming will bring both benefits and risks for games businesses. It has the potential for platforms to be opened up and restrictions to be lifted. However, there are also risks, particularly for the more powerful games businesses.

Whether those business hold market power must be assessed with respect to gamers, but also with respect to other levels of the value chain. As the cases involving Apple's App Store have demonstrated, market power may, for example, also exist between a platform and the developers that depend on that platform to get their games to players.

As the antitrust watchdogs turn their gaze to gaming, it is more important than ever to recognise these risks and opportunities. Businesses whose innovations are hindered by platforms may see an opportunity to have those restrictions lifted. Larger businesses and platforms on the other hand need to ensure they fully grasp how competition authorities will view their relationships with other players in the value chain to avoid falling on the wrong side of the line.

For gamers, meanwhile, exciting times are ahead, with enhanced competition and investment hopefully improving the gaming experience overall.

Interested parties can respond to the CMA's consultation until 22 July 2022.

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