This is Why Apple Blocks Xbox Cloud Gaming (Premium)

The other day I wrote about an incredible report from the UK Competition & Markets Authority that describes Apple’s abusive business tactics. There’s a lot to this report, and I strongly recommend that anyone interested at all in personal technology take the time to read through it. That said, it is over 350 pages long, making it hard to find its many insights.

Here, I’d like to focus on one that’s quite meaningful to me: Apple’s incredible 2020 decision to prevent Microsoft from bringing Xbox Cloud Gaming—previously codenamed Project xCloud—to the iPhone and iPad. At the time, I had openly wondered whether Apple’s stance on Xbox Cloud Gaming was related to Apple Arcade, the game subscription service that Apple launched around the same time that Microsoft started publicly testing xCloud. But as the UK report points out, there’s much more to it than that.

First, a bit of background. Microsoft announced Project xCloud in October 2018 and began testing the service internally in May 2019. This was followed by a public preview in October 2019 that suspiciously was made available only on Android at first. And when a more limited public preview for iOS followed in February 2020, we got our first hint at why our suspicions were correct: unlike with the Android version, Project xCloud on iOS only provided access to a single game. Hm.

By August 2020, the iOS preview had expired with no major updates, and Microsoft finally began expressing its frustrations publicly. The problem, it said, was Apple. Which had restricted the number of testers Microsoft could sign-up and prevented the firm from letting its app stream games from an Xbox One console. But the biggest issue, of course, was that single game limitation: Apple would not allow users to stream the entire xCloud game catalog from a single app, called Xbox. Instead, it wanted Microsoft to offer each game via its own app so that it could apply its 30 percent in-app and online services fees and approve each app individually.

In September 2020, Apple went public with the just-invented new App Store policies that it was using to prevent Microsoft from bringing Xbox Cloud Gaming to its devices. Among the requirements, each game update had to be submitted for review, and “games must use in-app purchases to unlock features or functionality, etc.,” ensuring that Apple would get its cut. Many, including me, argued that game streaming services should work just like video or music streaming services. Netflix, after all, doesn’t have to create a new app for every movie and TV show it offers.

“This remains a bad experience for customers,” Microsoft noted at the time. “Gamers want to jump directly into a game from their curated catalog within one app just like they do with movies or songs, and not be forced to download over 100 apps to play individual games from the cloud. We’re committed to putting gamers at the center of everything we do, and providing a great experience is core to that mission.”

In early 2021, Microsoft offered a workaround to Apple’s egregious and unfair policies by offering Xbox Cloud Gaming on Apple’s devices via the web. And it later pointed a middle finger toward Cupertino by bringing Fortnite back to the iPhone and iPad, for free, via Xbox Cloud Gaming after Apple had banned the app when its maker, Epic Games, fought back against Apple’s in-app purchase rules. (Not coincidentally, Microsoft also supported Epic in its court case against Apple.) Apple also retaliated against Epic Games by terminating its developer accounts and cutting off the firm from its iOS and Mac developer tools.

But back to that UK Competition & Markets Authority report. Among the many things that this regulatory body examined during its year-long investigation of Apple was how the firm had responded to the advent of game streaming services like Xbox Cloud Gaming. And its findings are quite damning: Apple, it says, fought Microsoft on this issue for two primary and interlocking reasons.

The first is that game streaming services undermine its services push, which has emerged as firm’s the next big business after the iPhone and iPad. As the original and most successful Apple service, the App Store charges exorbitant fees to developers on paid apps and in-app purchases, and Apple has vigorously fought any attempts to lower fees by using bogus arguments about quality, reliability, privacy, security, and the cost of maintaining the store. And the App Store, like newer Apple services, is also unique as a business in that it is 100 percent reliant on the success of Apple’s hardware devices: if the iPhone and/or iPad didn’t exist, the App Store and its revenues would also disappear. It’s not a standalone business.

But why is game streaming any different from video or music streaming? Well, when the UK examined the App Store, it found something interesting: over half of all App Store in-app purchases revenues come from games. This situation, which is mirrored in Google’s Play Store on Android, means that games are disproportionately important from a revenue perspective and that game offerings that bypass this system, like game streaming services, could inordinately harm future revenue potential.

The second major reason is tried to Apple’s reliance on device sales. The firm currently generates about 80 percent of its revenues from devices, despite the complementary growth of its services business, and the iPhone is, by far, its most important and lucrative product. And as I’m sure you noticed, the iPhone is exclusively an expensive, premium product line, and Apple promotes new versions with a relentless succession of performance claims in an effort to differentiate them from the pedestrian Android horde.

And that’s why Apple cannot allow game streaming services to gain a foothold on its devices. Game streaming services like Xbox Cloud Gaming rely almost solely on Internet speeds and abstract away the hardware, allowing powerful and visually impressive next-generation 3D games to run on middling hardware. (Xbox Cloud Gaming will soon run via smart TV apps, for example, and it already works via mobile web browsers.) And in this case, you don’t have to my word—or the UK’s—for it.

“In an internal document (email) in 2020, a senior Apple employee commented that [Apple has a strategic interest in supporting high-quality content that leverages the differentiated capabilities of Apple devices],” the report notes. “In a different context, as revealed in court documents in the Epic litigation, Apple’s senior Vice President of Software Engineering, Craig Federighi, explained to an Apple employee who suggested that Apple acquire a cloud streaming company that cloud streaming apps would make ‘little sense for Apple (given our strength of providing high performance local compute)’, and that they would be ‘counter to our overall customer value proposition’.”

Some game streaming providers—presumably including Microsoft—argued to the UK that Apple was obviously protecting its devices business by hindering partners that wish to offer services that it felt would undercut that business. That is, “Apple’s hardware revenue from iPhone sales were influencing factors in Apple’s decisions around the restrictions on cloud gaming on iOS.” One of these providers—again, presumably Microsoft—specifically argued that “Apple is the only manufacturer of mobile devices that can sell premium phones on a large scale, and that a transition to cloud-based services will reduce the need for high-end devices thereby threatening Apple’s hardware business.”

The UK found that the game streaming providers were correct. “The reasons cited by Apple do not provide a compelling justification for its restrictions on cloud gaming apps,” it concluded. “Cloud gaming services can be offered in a way that is compatible with privacy and security considerations.”

So, there you have it. Preventing a nascent business (like game streaming) from becoming successful to protect an entrenched product (the iPhone) isn’t just unfair to its partners and customers, it’s a classic example of monopoly maintenance and restraint of trade. And it’s something antitrust regulators from around the globe should prevent Apple from doing.