DOJ Probes Apple App Store Guidelines That Restrict Cloud Gaming Services, Super Apps

Published on Mar 17, 2022

DOJ attorneys are probing whether guidelines Apple (AAPL) uses to restrict cloud gaming services and so-called super apps’ access to its App Store could harm competition and cement the company’s mobile dominance, sources familiar with the matter said.

The department’s investigation, which has intensified in recent weeks, is partly focused on section 4.7 of Apple’s app store guidelines—one of a web of provisions that third parties have complained the company employs to thwart competitors and competition.

Apple has used section 4.7 to prevent cloud gaming services from offering native apps in the App Store. Although the company has cited security and quality rationales for those decisions, third parties see an anticompetitive motive—the gaming services are rivals to Apple’s Arcade gaming offering, and even threaten to undercut the company’s position in mobile hardware.

And it’s not just gaming: DOJ lawyers are also evaluating whether section 4.7 is stymieing the growth of “super apps,” sources said.

The super app concept first gained popularity in China with Tencent’s (0700: HKG) WeChat, which provides functions like messaging, payments and services under a single umbrella app. Super apps like WeChat also offer numerous third-party “mini programs,” that users don’t need to download or install, and instead live inside the larger app.

Whether the concept will catch on in the U.S. isn’t clear—some analysts view it as unlikely, others inevitable. Nonetheless super apps represent perhaps the strongest threat to Apple’s mobile dominance, as they allow users to bypass the App Store, lower switching costs between mobile ecosystems, and could otherwise undercut the Apple iPhone’s lucrative market position.

DOJ’s investigation into the section 4.7 issue comes as part of a broader probe into the Cupertino, California-based company that began in mid-2019 and has focused in large part on App Store issues. The App Store also has attracted scrutiny from other global agencies, including the European Commission and the UK’s Competition and Markets Authority, both of which last year deepened their investigations into whether the store’s guidelines harm competition.

A DOJ spokesperson declined to comment, and Apple didn’t respond to requests for comment.

Cloud gaming. The most straightforward issue on DOJ’s radar in its growing scrutiny of Apple’s App Store guidelines involves cloud gaming services.

These nascent services allow users to stream video games through the cloud from servers in data centers to their devices. Prominent offerings in the market include Microsoft (MSFT) Game Pass Ultimate, Google (GOOGL) Stadia, Facebook (FB) Gaming, Amazon (AMZN) Luna, and Nvidia (NVDA) GeForce Now.

Those are also some of companies seen as best positioned to build super apps in the U.S. market, alongside payments firms like PayPal (PYPL), Venmo and Square (SQ); mobility companies like Uber (UBER); and social media apps like Snapchat (SNAP).

Section 4.7 allows the distribution of apps that run code outside of the app, like web-based games or bots, “as long as…the code is not offered in a store or store-like interface.” That’s a provision Apple reportedly cited in repeatedly rejecting Facebook Gaming’s native iOS app in 2020.

Facebook did finally launch the app—which users primarily employ to watch friends play video games—on iOS in August 2020. But it did so without its Instant Games component, which provides users access to a variety of mobile games, after Apple rejected it under the auspices of section 4.7, Facebook said.

In contrast, Facebook launched the app with the Instant Games feature on Google Android, the other dominant global mobile operating system, with no issue whatsoever.

Apple cited another section of its guidelines, 4.27, in rejecting a beta version of Microsoft’s Game Pass Ultimate in February 2020, according to evidence produced during Epic Games’ antitrust litigation against Apple. The company did so, an Apple executive said in an email, because the section provides that “thin clients for cloud-based apps are not appropriate for the App Store.”

The Apple executive proposed a path forward, provided that Microsoft offered separate, downloaded iOS apps for every game available on its service. Game Pass, however, includes more than 100 games, and Microsoft Corporate Vice President of Gaming Lori Wright replied in an email included in court documents that the offer was “unfeasible” and would “result in a terrible user experience.”

Section 4.9. Following those scrapes, Apple in September 2020 added a section 4.9 to its guidelines that allowed game streaming apps provided that “each streamed app is made available as a separate app on the App Store.”

But that simply codified the previous Apple proposal that Microsoft and others viewed as unworkable, and cloud gaming streamers have responded by offering their services to Apple iOS users through web apps, rather than native apps. Relegation to web apps makes it harder to build user awareness and creates issues with latency, among other disadvantages, the companies have said.

As Facebook learned, these issues are specific to Apple—cloud gaming streamers like Microsoft and Nvidia have successfully introduced native apps on Google’s Android operating system.

The UK CMA’s December 2021 interim mobile ecosystems market study came to a similar conclusion: App Store restrictions have foreclosed competition from cloud gaming services, and section 4.9 has done little to address the issue.

That report detailed the authority’s concerns that Apple had “used its control over access to the App Store to block the emergence of an innovative cloud gaming business model” in order to protect its own hardware, control over apps in iOS, and Apple Arcade product.

Microsoft made a similar argument in a January 27 amicus brief to the Ninth Circuit, which is set to hear Epic Games’ appeal of the district court’s decision in the Apple litigation.

“Apple’s decision to block this step-change in mobile gaming technology and quality—all while offering Apple Arcade, a gaming product of its own—harms competition and consumers in mobile gaming,” the company said.

Microsoft also argued that the restrictions “harm[] competition and consumers in smartphone markets more broadly, where consumers’ inability to use innovative cross-platform services like Xbox Game Pass Ultimate helps protect Apple’s market power.”

Super apps. Microsoft’s allusion to “innovative cross-platform services” speaks to the question of whether section 4.7 could have broader competitive implications—an issue that has recently drawn DOJ’s attention.

In discussing a 2019 update to the section, Apple said that apps must be “self-contained bundles,” and their core features and functionality “must be contained within the binary of the software, rather than made possible by referring users outside of the approved app.”

“Apps that provide core features and functionality dynamically with web technology like HTML5 are best delivered to everyone in Safari, rather than through the curated App Store,” the company added.

That language would seemingly apply to super apps like WeChat, which in 2017 launched “mini programs” that allow users to load lightweight apps instantly from within its larger app. There are now more than 1 million such programs, with games a particularly popular use case.

Although “mini programs” seemingly violate the App Store rules, one source said Apple has made exceptions for WeChat—a charge that various reports have echoed. Apple hasn’t publicly explained whether—or why—it has granted WeChat exceptions, but the app’s existing dominance in the Chinese market is one rumored explanation.

That also speaks to broader third-party concerns about Apple’s App Store rules—the company is effectively judge, jury and executioner on the question of whether apps comply with its guidelines. And even if a well-counseled developer were to find a clear loophole in the rules, there’s nothing to prevent Apple from simply changing them.

In any event, users who launch apps from within WeChat or other super apps don’t need to download them from an app store. That’s a serious threat to Apple, which takes a 30% commission on apps purchased through its app store, as well as 30% on subsequent in-app payments—cuts that allow Apple to realize extraordinarily high profit margins on the store.

But the implications could be far broader—if iPhone users migrate directly to a super app rather than their iOS home screen, they’re also much less likely to use other Apple apps like iMessage, Apple Pay, News and Arcade.

Not only that, but super apps could also weaken the importance of iPhone’s premium positioning. That’s a conclusion the CMA market report reached on cloud gaming, citing third-party feedback that “a transition to cloud-based services will reduce the need for high-end devices, thereby threatening Apple’s hardware business.”

The rise of platform-agnostic cloud gaming services would also reduce consumers’ barriers to switching mobile phone ecosystems, for example away from Apple’s iOS to Google’s Android, the CMA found. Platform-agnostic super apps could have a similar—and probably much greater—effect.

That means Apple’s most significant threat in Western markets may not be rival hardware manufacturers, operating systems or app stores, but instead super apps.

To be sure, the outlook for those products in the U.S. and Europe is far from clear. But the possibility that Apple has stifled super apps’ potential growth in their incipiency—and whether those restrictions in turn violate the antitrust laws—is now an issue firmly on DOJ’s radar.