Context: On Thursday (January 25, 2024), Apple announced certain new rules with worldwide effect, among them the abolition of the requirement that each game offered by a streaming service be submitted to Apple’s app review (Apple press release). Later that same day, Apple also announced some new and EU-specific rules relating particularly to alternative iOS app stores (Apple press release) with a view to the impending entry into force of the EU Digital Markets Act (DMA). Apple’s new EU rules render the DMA pointless (and don’t allow the direct installation of apps from the web) (games fray article; apparently the first article worldwide to explain the “sideloading” issue); the enforcement of the DMA against those rules would require a judicial (or at least court-reviewable) determination of fair, reasonable and non-discriminatory (FRAND) terms (games fray article); and a 50-eurocent (US$0.54) per-user per-year fee doesn’t create any commercial opportunity for alternative app stores outside of adult content and potentially some niche markets (games fray article).
What’s new: Sarah Bond, President of Microsoft’s Xbox division, made a public statement on X (formerly known as Twitter) describing “Apple’s new policy [as] a step in the wrong direction” and sharing a much more belligerent post by Spotify founder Daniel Ek. That is another warning shot in Apple’s direction.
Direct impact: As Microsoft presumably knew anyway, its call for “constructive conservations [that] drive change and progress towards open platforms and greater competition” will fall on deaf ears, as Apple has clearly decided to maintain its App Store monopoly in the EU for years to come, knowing that the EU will (in games fray‘s opinion) have to amend the DMA in order to truly open up the market. This article describes what it would meean for Microsoft to operate an alternative app store in the EU under Apple’s terms (games fray believes it would not be fruitful). This article also discusses that the context of this statement is not cloud streaming, where Apple is apparently trying to settle a UK antitrust investigation (games fray is more optimistic about that one).
Wider ramifications: Microsoft sharing an aggressive statement by Spotify is the latest example of Microsoft increasingly being aligned with the goals of (and the positions of key members of) the Coalition for App Fairness, which Epic, Spotify and Match Group founded in 2021. The statement suggests Microsoft will at minimum, raise serious concerns over Apple’s conduct with regulatory authorities, and may also push for a rapid amendment to the EU DMA. Even a Microsoft v. Apple lawsuit, such as in the form of private DMA enforcement in the EU, is not entirely impossible further down the road, though at this stage the tone and the messages do not suggest that litigation by Microsoft over the App Store is imminent.
Microsoft’s new statement
Here’s the Xbox president’s X post:
It’s key to read not only the first part of what Microsoft shares from Spotify’s comments on Apple’s rules. That X post was just the start of a long thread, and it also points to Spotify’s statement on the web (corporate website), which culminates in the accusation of a “blatant disregard” of the principles of the DMA.
Microsoft’s previous App Store statements
In October 2020, Microsoft’s antitrust chief Rima Alaily said the company supported the 10 app store principles outlined by the Epic-Spotify-Match Coalition for App Fairness (CAF) (corporate blog post). Microsoft has not joined the CAF so far and never may intend to do so.
In the spring of 2021, Xbox vice president Lori Wright testified in the Epic Games v. Apple trial. Her testimony was very powerful. Apple was so angry that its lawyers described Microsoft as somehow depending on Epic, only to later suggest that Epic was acting like a “stalking horse” for Microsoft.
In February 2022, only a few weeks after Microsoft had announced the merger agreement with Activision Blizzard King, its president Brad Smith published a statement on Microsoft’s mobile app store plans (corporate blog post), to which ABK’s games are obviously key as a new app store can take off only with compelling content.
Microsoft’s mobile app store ambitions came up on various occasions during the regulatory proceedings relating to the ABK deal. That merger was consummated in October 2023.
In December 2023, Microsoft Gaming CEO Phil Spencer said in an interview with Bloomberg that an Xbox mobile app store was not multiple years away and that Microsoft was in discussions with potential (unnamed) partners (Techcrunch article).
Cloud streaming (xCloud native iOS app) is a separate issue where the UK is actually the more important jurisdiction
Some reporters and gamers were wondering whether the Xbox president’s statement relate only to the question of an alternative mobile app store (as well as the terms for distribution via Apple’s App Store) or also to the possibility of offering a native iOS app for xCloud.
In games fray‘s analysis, the statement is clearly related only to the question of alternative mobile app stores: Microsoft endorsed (by way of sharing) Spotify’s statement. Spotify talks only about those EU-specific rules, not about worldwide cloud streaming of games.
While Apple made both announcements (cloud streaming and EU DMA response) on the same day, there are major differences between the issues. The statement about cloud streaming (and mobile browser engines) is about worldwide (not just EU-specific) rules. And the issue with respect to cloud streaming is merely one of app review: prior to that statement, Apple (unlike Google) took the position that all games offered in a streaming app would have to be reviewed by Apple. Then they announced last week they were going to waive that requirement, and even on a worldwide basis, while Apple’s DMA-related changes will apply only in the EU and Apple argues it must protect the rest of the world from alleged security and privacy issues.
In games fray‘s analysis, the primary driving force with respect to cloud gaming is not the EU with its DMA. In this regard the EU plays, at best, a secondary role.
The UK Competition & Markets Authority (CMA) conducted a market study in 2021 with respect to mobile browsers and cloud gaming. The two topics may appear unrelated at first sight, but the combination makes sense: on the one hand, Apple used its app review prerogative to prevent cloud streaming service like xCloud from being able to operate as a native iOS app; on the other hand, Apple used its death grip on the iOS app ecosystem to prevent mobile browsers from providing a really good user experience to cloud streaming users, as Apple required all mobile browsers to use Apple’s WebKit engine. In other words, Chrome on iOS so far is not really Chrome: it’s the Safari engine with a Chrome interface. As a result, even Safari’s “competitors” weren’t truly competitors who could have improved the cloud gaming user experience at the browser level, which would have been an alternative to native apps.
It was a “heads I win, tails you lose” situation: native apps were not allowed, cloud gaming in browsers was suboptimal because Apple didn’t suppport it well and didn’t even allow Google and others to provide better support through their iOS browsers.
What happened procedurally was that the UK CMA arguably missed a key deadline for when to proceed from a market study (which is like a preliminary investigation) to a full-blown market investigation (which it did in late 2022). The UK Competition Appeal Tribunal (CAT) agreed with Apple, but the CMA appealed, and the UK Court of Appeal reversed the CAT decision.
The CMA then announced last Wednesday (January 24, 2024) that it restarted its mobile browsers and cloud gaming investigation (CMA market investigation webpage), and invited interested parties to submit their observations on the issues statement.
In connection with Microsoft’s acquisition of ABK, the CMA defined the relevant market as global and insisted on global remedies. It’s obvious that the UK market alone would not be large enough to make the extremely costly development of true iOS browsers (i.e., browsers that use their own engine and not the same engine as Safari) commercially viable. The CMA’s issues statement mentioned that Apple restricted competition “globally” (including the UK) without stating a geographic market definition at that stage.
It’s obvious that Apple is more afraid of the CMA in this context than the European Commission. That is not to say that Apple has nothing to fear from the EC: also this month, Apple actually offered remedies to the EC with respect to tap-to-pay services. The EC’s Directorate-General for Competition (DG COMP) is seeking feedback (EC website). This is called a market test. But the Apple Pay investigation was already taking place under traditional EU competition rules as opposed to being DMA-specific, though any remedies would obviously also have to comply with the DMA now.
The DMA was another reason for Apple to address the mobile browser and cloud streaming issue, but only a second priority. The DMA has major weaknesses, and games fray does not believe the DMA will serve its stated goals without an amended piece of legislation. What Apple is more worried about in the short term is what regulators like the CMA or DG COMP could do under existing antitrust laws. That’s why Apple offered remedies to the EC concerning Apple Pay, and effectively (though it wasn’t stated in the announcement of new mobile browser and cloud streaming rules) to the CMA concerning cloud gaming.
Apple clearly made the announcement concerning cloud gaming with a view to the CMA investigation. It’s basically a settlement proposal to the CMA. Microsoft will have the opportunity now to share any concerns about Apple’s cloud streaming rules with the CMA, as will other market participants. Some documents will be made publicly available by the CMA in the near term.
Apple’s calculus
There’s a clear prioritization here: Apple apparently determined that it couldn’t find a war with regulators on 100 fronts. In fact, the United States Department of Justice (DOJ) is reportedly planning its own antitrust lawsuit against Apple. So Apple looked at essentially four factors:
- where most of its non-hardware profits come from (the App Store monopoly);
- where it has the most control over how users discover apps and what apps are allowed and commercially viable on iOS, as this enabled Apple, for instance, to just destroy the market for iOS in-app ads and build its own advertising service (here, again, the App Store monopoly is key);
- which battles would be easiest to win or where they could at least delay things without taking major risks; and
- in each case, what effects a concession in one jurisdiction would have in others (for instance, EU DMA rules and the upcoming enforcement dispute with Epic Games in the United States).
If they had been given the choice, they’d have wanted to keep everything: the App Store monopoly, the Apple Pay monopoly, the iOS browser engine monopoly, and the app review rule with respect to cloud streaming.
They would have enough money to fight all those wars. But management bandwidth is a bottleneck that can’t be entirely solved with money. Political capital and overall reputation are other factors. Looking at all of that (and more), they determined that they should settle at least some issues.
The stakes with respect to the DMA were way higher than the Apple Pay, cloud streaming and mobile browser questions. Alternative app stores could have become very successful in the EU in the short term, which would sooner or later have encouraged other jurisdictions, even U.S. Congress (where the Open App Markets Act has some support but not enough), to promulgate similar laws. It would have completely debunked Apple’s argument that alternative app stores, even if run by the likes of Microsoft and Amazon, would compromise privacy and security.
Chances are that Apple was afraid of Microsoft’s app store more than of anyone else’s. Microsoft is a similarly large organization, but above all, the acquisition of ABK and some other mobile apps would have put Microsoft in an extremely strong position to attract many users to its own app store.
Apple then saw that the DMA has major shortcomings, which means Apple has little to fear under the DMA as it stands. This is an election year in the EU, meaning that if the EU institutions realize they have to amend the DMA (as games fray believes they should), it’s all going to take time. Apple could also have appealed any antitrust rulings by DG COMP on Apple Pay and by the CMA on mobile browsers and cloud gaming, but there was more to lose and a clear and present danger of hefty fines. With the EU DMA, however, games fray considers it unlikely that any fines would be massive, given that any determination of fines would have to take into consideration that the DMA’s rules have loopholes and leave a lot of room for interpretation in critical areas.
It’s obvious that Apple won’t engage in constructive discussions with anyone about its EU-specific rules. There’ll be litigation, and the EU will need better legislation.
Could Microsoft still make an Xbox app store work on iOS in the EU?
It can be ruled out very safely that an Xbox store on iOS in the EU, under Apple’s current rules and in light of the DMA’s shortcomings, would become a huge success and result in effective competition.
There wouldn’t really be an economic incentive for other game makers to offer their games through an Xbox store. As explained in the previous games fray article, an app maker who opts for distribution via alternative stores would have to pay Apple 50 eurocents (US$0.54) per install per year. But if the third-party game maker has to do that, the point of comparison is not Apple’s 30% cut: it’s a a 20% app tax on top of the install fee. If Microsoft, for instance, charged 12% to finance its own store (which by the way also has to pay the 50 cents per app with respect to its own storefront app), that would be a saving of 8%. If the game maker decided to split the gains with gamers, it means everything would cost 4% less, and the game maker would keep an extra 4%. And for many games the combination of the install fee and a 20% app store commission is actually a worse deal than just keeping Apple’s old terms (no install fee, 30% commission, but also no right to distribute via alternative app stores).
It’s a chicken-and-egg problem because a new app store won’t be attractive to gamers without compelling content, and won’t be commercially attractive to app makers unless they reach many gamers.
Apple’s commercial rules make it impossible to provide a major economic benefit. And then there are all sorts of technical rules that impede competition, such as the need to delete and reinstall an app is switching between app stores, the settings that users have to change, and the fact that app makers would have to create separate app versions just for the EU (a large market, but still a major effort).
There could be a limited opportunity for a Microsoft app store on iOS in the EU. It’s not inconceivable that Microsoft might launch an iOS app store in the EU anyway, but it wouldn’t be a game changer that gives game developers a viable alternative to Apple’s App Store.
Just like Apple’s rules and terms may now result in the creation of one or more dedicated “adult content” app stores in the EU, there could be a viability for opportunity for certain subscription-based services. For instance, if Microsoft set up its own app store just to offer an iOS version of its Game Pass subscription service and/or for subscription-based Office products, Apple’s per-install per-year fee may be a better deal than the 30% App Store cut.
It’s actually simple: if you do a freemium app, the 50 eurocents hurt a lot, because maybe you only get 2% of your users to pay, in which case you pay 25 euros per year per actually paying customer just for the install fee. But if 100% of your users will pay (because it’s a subscription-based offering like Game Pass), then the economics are different.
In that case, the question is whether you believe you won’t lose too many users as a result of Apple’s technical rules that are meant to hassle users under a security pretext. That, again, is probably not going to be an issue with respect to “adult content” because Apple doesn’t allow such apps (and never will allow them) on its own App Store. In that business, the question is whether native apps offer enough of a benefit over web apps. And if Apple does indeed give up the iOS browser engine monopoly, then even “adult content” may be more profitable in the form of web apps (which won’t be taxed by Apple in any way).
The bottom line is that Microsoft may or may not offer an Xbox store on iOS in the EU anyway, but it wouldn’t be a game changer and it’s therefore rather questionable whether Microsoft will want to devote management and development resources to that effort at all. This is just games fray’s perspective without knowing anything about Microsoft’s thinking concerning Apple’s new rules other than Mrs. Bond’s X post.
Legal and political implications of a limited-use Xbox store on iOS in the EU
Presumably Microsoft hasn’t made a definitive decision yet, other than having identified major issues with Apple’s new EU rules that make it clear there won’t be effective competition in iOS app distribution in the EU for years to come.
If Microsoft went ahead and offered an iOS app store of limited use, Apple would point to it when defending its rules in court, though the limited traction of such a store could be held against Apple.
Also, if Microsoft actually did operate such an iOS app store in the EU, it would potentially be able to produce additional evidence of how Apple’s rules hurt, such as statistics that show what issues end users face as a result of technical rules or the result of any efforts to get third-party app makers to offer their games via the Xbox store.
In games fray‘s opinion, Microsoft is much more likely to determine that Apple’s current rules weigh against even trying to offer its own iOS app store in the EU. In the end, Microsoft wants to bring its games to as many gamers a possible, and that’s why Microsoft will likely opt to stay on Apple’s App Store in the EU unless and until there’s an opportunity to compete in a meaningful way.
Inhowfar are the two issues related for Microsoft’s purposes?
If alternative app stores were viable on iOS, then Microsoft wouldn’t even have to care about the app review rules that have so far prevented it from offering a native iOS app for xCloud. But the DMA would be EU-only anyway, and Apple has changed the cloud streaming rule.
The DMA could also have brought down in-app prices in the EU, but it practically won’t (for the reasons explained herein and in the three previous articles). That, again, would have been an EU-only effect.
A native iOS app for xCloud is now very likely to be created. It’s more likely than not to be distributed via Apple’s App Store around the globe, but should Microsoft create a limited-purpose iOS app store in the EU, then the EU version will be offered there.
How will Microsoft’s relationship with the Coalition for App Fairness evolve?
After testifying in the Epic Games v. Apple trial in 2021 in a way that infuriated Apple, Microsoft has now endorsed (by sharing) Spotify’s criticism, and in 2020 Microsoft had already endorsed the CAF’s app store principles.
If Microsoft joined the CAF, it would lend more weight to an organization that has been unable to expand much beyond its original group of founding companies. But there are reasons for which proximity presumably remains the better choice than membership. For instance, if Microsoft joined, it would be so much larger than the other companies that Apple would claim the CAF is dominated by Microsoft.
Apple’s latest moves don’t suggest that Microsoft joining the CAF would now make more sense than simply stepping up everyone’s efforts to fight for open app markets.
The CAF is not a party to Epic’s litigations, and rarely comments on them. But the issues are the same. As games fray suggested (January 19 article), Epic’s U.S. injunction under California Unfair Competition Law creates a potential opportunity for major game makers such as Microsoft to get more and more gamers to purchase digital items (including, but not limited to, digital currency) on the web. If Microsoft were to do that, and if Apple obstructed such efforts, that could make a major difference and would strengthen Epic as it seeks to enforce its U.S. injunction against Apple.
Both Microsoft and the CAF should talk to EU lawmakers after the election and lobby for an amended version of the DMA.