Apple’s Regulatory Problems Could Hit its Crown Jewel, iPhone

Apple’s quarterly earnings went up 11% to a record $123.9 billion, with revenue from iPhone sales at $71.63 billion, up 9% year over year. Services, which include App Store fees, continued growing, rising 25% annually, to $19.52 billion.

Yet, while consumers may still buy Apple devices, and developers will continue using the App Store to distribute their apps, regulatory pressure on Apple is mounting and the latest report from an antitrust authority may point at a new threat that could impact Apple crown’s jewel, the iPhone.

The U.K.’s Competition and Markets Authority (CMA) recently published an interim report on mobile ecosystems. Besides the usual concerns on how Big Tech companies leverage their position in the markets where they are dominant (App Stores, search, online advertising) to get an advantage in adjacent markets, the regulator identified a new potential restriction in cloud gaming.

The report concludes that “Apple has blocked the emergence of cloud gaming on iOS.” Cloud gaming uses the features of the cloud to offer games in a way that is “platform-agnostic.” For instance, users can access a catalogue of games for a monthly subscription (like Microsoft’s Game Pass) and play on their consoles, phones or any device.

The advantage of cloud gaming for users who play on mobile devices is that cloud gaming exceeds the technological capabilities of any phone because storage and processing occur in the cloud. Thus, cloud gaming removes phone storage limitations and processing capability and allow users to enjoy their games without relying in the latest smartphone model. While cloud gaming is still in a nascent stage of technology, if users prefer to use the cloud rather than downloading games in their phones, it could have an impact on the number of iPhones sold, especially among the younger population.

The CMA has identified this concern in its interim report, and it has also review Apple’s App Store Review Guidelines where, according to the regulator, Apple includes various policies that may restrict how cloud gaming apps can function as native apps from the App Store. Apple doesn’t allow apps offering access to a catalog of games and requires instead that each game is submitted individually. This means users need to download individually each game in their devices, which in turn also gives Apple an important source of revenue as each game must be paid using the Apple’s In-App Purchase system, for which it charges around 30% of the value.

The interesting part of the report is how the CMA looked at the potential harm to competition. Rather than focusing on the cloud gaming, where Apple doesn’t have a strong presence, the CMA looked at Apple’s incentives to protect its own hardware and its app distribution. If Apple can hinder the development of cloud gaming by blocking certain apps from the App Store, users would still need high-end phones to play the latest games. Apple may also have an interest in not allowing the next Spotify or Netflix for cloud gaming as this could pose a threat to a growing source of revenue.

These provisional findings may change in the final report, and even if they are confirmed, it doesn’t mean Apple would have to change its policies. The regulator may open a separate investigation or not, and Apple may also be able to provide justification for this restriction. But regardless of the result, this is another brick in a long road of regulatory challenges the company is facing.

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