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New Players in the Game? Investigating the Emergence of Cloud Gaming and the Changing Landscape of the Video Game Industry

Posted on    by Ayse Gizem Yasar
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New Players in the Game? Investigating the Emergence of Cloud Gaming and the Changing Landscape of the Video Game Industry

By 20 January 2023No Comments

Blog by Amy ThomasAyse Gizem Yasar, Kenneth Barr & Magali Eben  

Introduction

This blog post introduces a developing strand of CREATe work examining key copyright and competition law dimensions of video games in the platform economy. This is particularly pertinent at a time where the proliferation of streaming technologies, business model innovation, increased levels of user creativity, and high-profile takeovers combine to potentially reconfigure this industrial landscape. This work will inform a forthcoming roundtable event, part of the CREATe @ 10: Policy Futures Series that will run in the first half of 2023. Details on the gaming events are at the end of this blog post. Participation is by invitation only. If you are interested in joining us, drop us an e-mail at Magali.Eben@glasgow.ac.uk

As a research centre concerned with empirically examining creative production in the digital age, research into video games has been a feature of the first 10-years of CREATe. This is evident in core work packages that formed the first wave of CREATe research, continuing in more recent research and events examining the games sector from various perspectives including copyright and contract. The specific focus of this current work is the recent emergence and proliferation of cloud gaming where video games are played online by way of a range of interfaces, including PCs, consoles, mobile devices, and smart TVs. Crucially, cloud gaming is facilitated by the availability of high-speed internet connections and remote servers that stream gameplay to players’ devices without requiring players to possess specialist hardware or software.

While remaining a modest contributor to the overall revenues of the video games industries, cloud gaming is the site of rapid and sustained growth. The Covid-19 pandemic has been viewed as a catalyst for accelerating this process. In this environment, digital distribution platforms, such as Apple App Store and Google Play, occupy a vital role as intermediaries between games publishers and prospective players. This evolving industry landscape presents a host of opportunities and challenges for producers, intermediaries, consumers, regulators… and academic researchers. It is this confluence of factors that provides the imperative for this new strand of collaborative investigation of cloud gaming and the platform economy at CREATe.

History of the Industry

The video game industry does not have a linear history (Ivory 2015). From early on, it has been characterised by a diversity of contributors, sources of inspiration, mediums and game formats.

In contrast to other traditional media sectors that existed before the internet, user creativity and contribution has been a staple of video games from the very beginning. For example, the legendary arcade game Ms Pac-Man (1982) was not developed by the original Pac-Man creator Namco. It was created by three youngsters who dropped out of MIT to create a business that developed enhancement kits for video games. Creative amateurs had a lot to do with the early development of video gaming. One prominent example is Spacewar!: often considered to be the first widely played video game, it was developed at MIT in 1962 by members of the Tech Model Railway Club known for its hacker culture. Spacewar! was never commercialised and its code was in the public domain from the start.

https://brotherbrain.tumblr.com/post/17249619877/pac-attack

Source: https://brotherbrain.tumblr.com/post/17249619877/pac-attack

While video games have borrowed a great deal from war and combat settings as well as sports competition, fantasy literature like Tolkien’s The Lord of the Rings was also an important influence from the start and paved the way for the co-creation of narratives among players (Ivory 2015). Multi-user Dungeon (MUD), created by two University of Essex students in 1978, was among the first interactive games. MUD was based solely on text and did not feature graphics. Interaction among players and role-playing were enabled by the university’s internal network, and later by Essex’s connection to ARPANET – the basis of the internet as we know it today.

The industry was not immune to crashes: two periods of recession in 1977-80 and in 1983-85 were followed by significant changes in trends and mediums. The first crash is attributed to the flood of low-quality console copycats of Atari’s Pong into the market, which is why it is also known as the ‘Pong crash’ (Ernkvist 2008). The time between these two periods is often referred to as the golden age of arcade games. Arcade video games and consoles emerged around the same time in the early 70s, and in their early days console game developers often licensed arcade games. Space Invaders is a notable example: originally an arcade game, Atari’s 1980 version for its Atari 2600 console is also known as the first killer app in video games, as it quadrupled the console’s sales. After the crash of 1983 (with the infamous mass burial of video game cartridges), arcade games gradually gave way to PC video games with the proliferation of PC use at home and later the internet.

As is the case in the computer industry, rebels have had a lasting impact on video games: four game developers for Atari defected in 1979 to create a company called Activision dedicated to developing video games. This was unprecedented at the time, since game development took place within console makers. A separate market for video games did not exist. Atari filed suit against Activision in 1980 which appears to have been settled out of court in 1982, allowing for the third-party game development to take off as a separate business model.

Current Landscape

While the golden age of arcade games is over, consoles and PCs remain two important mediums for gaming. The industry has also followed the mobile trend, especially since the dawn of smartphones and the launch of Apple’s App Store. Although hard core players may not immediately want to swap their PC for their phone, mobile games are a large segment in gaming. As of 2022, worldwide revenues from mobile gaming reportedly made up half of the sector worldwide, surpassing consoles and PC gaming. While video game sales traditionally consisted of one-off purchases, the internet has allowed for the development of free-to-play games that rely on in-app purchases (IAP) and advertising for revenue stream. The free-to-play (aka freemium) model is especially popular in the mobile segment. Meanwhile, console game developers derive the majority of their revenues from premium games, which are currently offered either as one-off purchases or as part of subscription services.

Despite early reticence in the community, the rise of streaming across different sectors has paved the way for players to stream games, aka cloud gaming, and for accompanying novel business models to emerge. Subscription services are a case in point. The success of subscription-based music and video streaming seems to have provided inspiration to the video game industry, as subscription-based services emerged from mid-2010 onward. Mobile gaming, cloud gaming, and subscription models have reshaped the way games are consumed in the past decade. The landscape of the industry is changing yet again with the rise of virtual reality (VR) devices that allow for player immersion. The wide-spread availability of streaming also created a new player community space in the form of video game live streaming for audiences. Amazon’s subsidiary Twitch is the most popular live stream platform for video games, eSports tournaments and gaming tutorials, which translate into sources of revenue for players. eSports tournaments that bring together professional as well as amateur players for gaming competitions, in turn, created a vast industry in its own right with a size of approximately USD 1.2 billion as of 2021 (Robertson 2021).

In terms of corporate actors, the games sector is populated by a number of large vertically and horizontally integrated operators including Apple, Google, Microsoft, Sony, Tencent, the activities of which spread beyond video games. There are also major games producer/publisher/distributors including Activision Blizzard, Epic Games, and Valve. Video streaming services like Netflix are increasingly entering the video game industry as an extension of their own streaming services. Within this ecosystem, large operators co-exist with a great many smaller-scale participants, while recent mergers and takeovers point towards increased consolidation. This M&A trend has attracted the attention of competition law enforcers and regulators which is of importance to our investigation (see below).

Pillars of the Project

The changes in the games landscape pose questions of particular interest to CREATe. To begin with, the CREATe team sees clear parallels with the research undertaken in other media, both on changing business models and power dynamics, and on the rights and choices of users and consumers.

The video games industry, while relatively young, displays some clear commonalities with other longer-established copyright-intensive media sectors such as music, literary publishing and TV production. Companies in the industry have adopted business models based on exploiting intangible intellectual property and have developed brands/franchises easily identified by players. In addition, parts of the supply chain arguably have an oligopoly structure dominated by several highly integrated transnational conglomerates. Of particular relevance here is the potential transition from games as an industry primarily concerned with the sale of discrete products i.e. individual titles, towards an industry where providing access to bundles of streamed content becomes an increasingly significant revenue-generating activity. This emergence of the streaming model for games has obvious parallels with developments in music and video streaming, among many other sectors. Similarly, it presents a host of questions about the implications of the turbulence created by these fundamental shifts.

There is a high degree of ‘fuzziness’ in identifying the core business models of the industry powerhouses, and which particular strands of these companies’ activities can be viewed as core revenue-generating activities. From the perspective of general users, Apple and Google may provide similar products and services, but the incentives of each company are likely to differ considerably due to fundamental differences in underlying business models. This can have significant implications for games producers, web developers and players alike. For example, Apple’s core business is the sale of devices, whereas Google derives the majority of its revenue from advertising. Whereas Google, with its focus on maximising advertising revenue, arguably has motivations to foster a more open system, companies with a focus on manufacturing hardware or licensing software like Apple and Microsoft might be incentivised to keep their ecosystems closed. The effect of these apparently divergent strategies on the distribution of cloud gaming services is a feature of a recent market study and current market investigation by the UK Competition and Markets Authority.

In summary, the diversity of actors and business model profiles in the games industry in the streaming era are as dynamic as they are complex. These shifts raise questions about what the role of user creativity is in the industry; whether there is a risk of increased market power and reduced competition (particularly with the involvement of tech companies); and what the recent high-profile mergers mean for innovation in games.

Role of user creativity

As mentioned above, player creativity has been a mainstay of innovation in the video game industry from early doors. With new technological developments and interconnected player communities, it has now become possible for the player to take on a new role: as a competitor to the creator of the primary game product. This may be through professionalised/monetised gaming on online platforms, eSports, modding communities, and many more viable derivative gaming industries.

Our investigation into the nature of the game market is particularly timeous amid the recent controversy surrounding the proposed updates to Wizards of the Coast’s Open Game Licence (pertaining to the use of Dungeons & Dragons content – or rather, its game rules and processes). A far cry from its GNU-esque beginnings, this significant change in trajectory from an influential game creator signals an intention to squash the player qua competitor through mandatory reporting of player projects and revenues, and royalty payments of 25% on those ‘major competitors’ whose total sales exceed USD 750k (read: Pathfinder, Traveller, Call of Cthulhu):

‘The OGL needs an update to ensure that it keeps doing what it was intended to do—allow the D&D community’s independent creators to build and play and grow the game we all love—without allowing things like third-parties to mint D&D NFTs and large businesses to exploit our intellectual property.’

The Wizards’ reference to intellectual property is an important one for the purposes of our investigation: it is a claim to control what they perceive themselves as legally ‘owning’ (however erroneously). Beneath the surface level claims, the creeping desire for control and generous perception of what is ‘owned’ suggests broader concerns about the under-monetisation of game IP; in turn this has fuelled rumours about game creators forcing out player creativity by transitioning to the very same subscription-style business models we are concerned with in our study.

Heightened antitrust scrutiny into the gaming sector and app stores at large

In the last two years, competition authorities on both sides of the Atlantic have started paying closer attention to the gaming industries. Gaming has been a high revenue industry for a long time, but it has recently seen consolidation and changes in business models which have piqued the interest of even the gaming noobs in antitrust. This interest may be attributed to the fact that changes in the industry have been led, accelerated or piggybacked by the Big Tech companies: the so-called ‘GAFAM’ (Google, Apple, Facebook, Amazon, Microsoft). Indeed, in addition to cases such as Wolfire v. Valve, the biggest merger reviews and antitrust investigations involve the likes of Microsoft and Apple, and to a lesser extent Google and Meta (formerly Facebook).

Key cases and investigations revolve around the power of App Stores in the mobile games landscape. In 2021, a US judge ruled in the long (and continuing) saga of Epic Games. Epic (the developer of Fortnite) had opposed Apple’s app store rules. These rules forced app developers such as Epic to use Apple’s own in-app payment solution and to pay Apple a commission of up to 30% on payments by users. The judge did not find that Apple had a monopoly position, and decided in favour of Apple on nine of ten counts. She did, however, find against Apple on its anti-steering policies under the California Unfair Competition Law. Rogers prohibited Apple from stopping developers from informing users of other payment systems within apps. Epic appealed the ruling, and the story continues across the Atlantic. In the EU, similar concerns have not only led to an investigation by the European Commission (AT.40716) but arguably inspired the obligations in the new Digital Markets Act. Furthermore, the UK Competition and Markets Authority raised concerns that Apple’s app store policies may have restricted the development of cloud gaming, by only allowing individual games to be offered through the App Store.

In addition, a consolidation spree involving Big Tech seems to worry competition authorities. In 2022, Microsoft came into the antitrust spotlight as authorities in the EU and the US (as well as the UK) started reviewing its acquisition of Activision Blizzard. Activision Blizzard (itself the result of a merger) is the developer and publisher of popular games on PC, consoles, and mobile, such as Spyro, World of Warcraft, Call of Duty, and Candy Crush. Microsoft is the owner of the Xbox brand. Everyone knowns Xbox as a console brand, but Microsoft has been expanding its reach into gaming for years, offering games through Xbox games studios (such as Halo, or Minecraft) and providing streaming services. Two of Microsoft’s most recent developments stand out: its introduction of a Game Pass (allowing gamers access to a catalogue of games at a monthly subscription) and its venture into cloud gaming.

Microsoft / Activision Blizzard is not the only proposed merger in town. Meta seems to be betting on VR for the future of gaming and it is currently defending its acquisition of the VR studio Within against the FTC. Within is not a gaming company, strictly speaking, and it is known for its fitness app Supernatural. But the FTC considers the acquisition to be part of a broader strategy to exploit network effects and dominate the entire VR space. The company recently acquired Beat Games and Sanzaru Games in 2019 and 2020 respectively – both now integrated into Meta’s AR/VR arm, Reality Labs. Meanwhile, Sony, the company behind PlayStation, purchased Bungie for approximately USD 3.6 billion in 2022, but the deal escaped antitrust scrutiny.

Antitrust authorities and scholars seem worried about the manner in which games will be distributed in the future and the oversized power certain firms may have in a games ecosystem. They raise concerns about the potential ability of app stores to limit how game publishers reach mobile users, or the ability of companies with big games catalogues to confine access to its games only to the users of their subscriptions and hardware.  Whether these concerns are warranted is part of our investigation.

Many of the questions about how games are distributed are closely connected with market definition. There is increasing uncertainty about the boundaries of relevant markets and thus of who competes and who has marker power.  Adding to the rise of mobile gaming, cloud gaming’s advent may further blur the boundaries between devices, allowing us to play any game on any device at any time without as much loss in quality. If games on all devices become interchangeable, the boundaries of the market broaden. Moreover, everyday life is becoming gamified, through apps and virtual assistants. Think of all the activities that are being turned into apps and ‘gamified’ in the process, with points being awarded to do this everyday thing better than your friends. From fitness, to learning languages, to watering your plants: there’s a game-app for that. What makes a game a real game, what market are those apps in? We may not be able to resolve questions about power, competition, and innovation outside of the relevant market. Therefore, the competition law strand of this project will also dig into market definition-related challenges in the gaming industry.

Platforms, mergers and innovation

Zooming in on competition law and merger control, the recent merger frenzy in the gaming sector did not go unnoticed by antitrust authorities (see above). Innovation concerns are prevalent in mergers across digital markets. So, it is no surprise that the gaming industry mergers are also analysed from this lens. Microsoft / Activision is a case in point. In its complaint to block the merger, the FTC argued that the acquisition was likely to dampen innovation due to reduced competition. For example, Microsoft would be disincentivised ‘to optimize Activision’s content for gameplay on rival hardware’ the agency noted. The same line of argument is also present in the FTC’s challenge of Meta/Within. In its press release announcing the in-depth investigation into Microsoft/Activision, the European Commission also mentioned its concerns that post-merger, Microsoft might engage in foreclosure strategies that harm innovation.

That said, it is far from clear whether mergers indeed reduce innovation in the gaming industry. Setting aside existing controversies over the relationship between competition and innovation (Kerber, 2017), the dynamics of innovation in the gaming industry appear to be unique. Historically, the games have been shaped not only by hardware and software developers, but also a great deal by the players themselves (see above). Spin-off industries have also flourished around gaming, such as professional gaming and eSports. This landscape makes it difficult to reach simplistic conclusions on the innovation effects of mergers in the industry. As part of this project, we target to investigate the meaning of ‘innovation’ in relation to video games and how innovation has been shaped by mergers in the industry.

Project Outlook

We launch this project with a cluster of engagements comprising a roundtable discussion, public lecture and gaming event on 16-17 February.

On the afternoon of February 16th there will be a roundtable discussion bringing together copyright and competition lawyers with industry participants to engage with issues around ‘Copyright, Competition and Business Models in App Stores and Gaming’. The discussion will interrogate power imbalances in the gaming industry which has resulted in antitrust complaints and investigations in the UK, EU, and the US, as well as considering alternative forms of private regulation to protect creativity.

Following the roundtable, there will be an early evening lecture as part of Glasgow Competition Talk series. The talk titled, ‘From music streaming to the metaverse: competition policy’s role in clearing (app store sized) roadblocks to innovation’ will be given by Dr Friso Bostoen (KU Leuven). This talk will examine the role of competition policy in removing barriers to innovation raised by app store operators.

The third part on Friday, February 17th relates to CREATe’s You Can Play: Video Games and User Freedoms project. It will feature project partner Blazing Griffin for a talk on user creativity, gaming session… and pizza.

Participation is by invitation only. If you are interested in joining us, drop us an e-mail at Magali.Eben@glasgow.ac.uk indicating your affiliation and why you are interested in this project.