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Apple Could Cripple Microsoft's and Google's iOS Cloud Gaming Apps

By Leo Sun – Sep 16, 2020 at 8:48AM

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Is Apple trying to hamper xCloud and Stadia's progress to protect Apple Arcade?

In early August, Apple (AAPL -1.96%) announced that new cloud gaming platforms like Microsoft's (MSFT -0.04%) Project xCloud and Alphabet's (GOOG -1.24%) (GOOGL -1.02%) Google Stadia wouldn't work on iOS because they violated its App Store rules.

At the time, Apple claimed that in their current forms, xCloud and Stadia offered access to games that Apple couldn't directly review and approve. But after Microsoft publicly protested the decision, Apple recently softened its stance and revised its App Store guidelines.

Apple's revised rules will allow Microsoft and Google to offer cloud-based games on the App Store, but each game must be approved and listed individually. Therefore, each cloud-based game must be installed from the App Store before it's added to a platform's library of cloud-based games.

A young man plays a mobile game on a smartphone.

Image source: Getty Images.

This structure might make sense for Apple since it allows it to approve each game and retain a cut of each title's in-game transactions, but it's much less convenient for gamers. More importantly, Apple could leverage these rules to throttle Microsoft's and Google's progress as it expands its own gaming ecosystem.

Tracking Apple's own gaming ambitions

Last year, Apple launched Apple Arcade, a platform that offered unlimited downloads and installations of over 100 games for $4.99 a month. The games can be played on iPhones, iPads, and Macs, and a player's progress can be saved on one device and resumed on another.

Apple Arcade isn't a cloud gaming platform, but a recent patent filing suggests it's interested in expanding its library with cloud-based games. That expansion would closely mirror Microsoft's latest moves.

In its current form, Apple Arcade resembles Microsoft's Xbox Game Pass. However, Microsoft recently bundled Game Pass with xCloud in its new Xbox Game Pass Ultimate plans -- which blurs the distinction between local installations and cloud-based games. In that context, it would make sense for Apple to expand Apple Arcade's library with cloud-based games.

Apple probably can't directly ban xCloud and Stadia from the App Store without sparking antitrust complaints, especially as its clash with Fortnite publisher Epic Games over in-app payments remains unresolved. But it can still hinder their progress by forcing gamers to download separate apps for each cloud-based game -- which would make xCloud and Stadia seem like less cohesive platforms than Apple Arcade.

Characters driving cars in Sega's Sonic Racing on Apple Arcade

Image source: Apple.

Expanding its walled garden

Apple's long-term plan is to expand its services segment, which generated 19% of its revenue in the first three quarters of 2020, to reduce its dependence on iPhone sales, which accounted for 53% of its revenue. The expansion of that ecosystem -- which includes Apple Music, Apple Pay, Apple TV+, Apple Arcade, the App Store, and other services -- will also lock in users through each cycle of hardware upgrades.

The App Store generates the lion's share of Apple's services revenue, but the platform faces rebellions from high-profile companies like Epic, Spotify (SPOT 0.60%), and Rakuten (RKUNY 2.59%) -- which all claim its 30% cut of in-app transactions is too high. Spotify and Rakuten's Kobo e-books unit also claim Apple's fees grant its first-party services -- specifically Apple Music and Apple Books -- unfair pricing advantages against their apps.

Apple claims its fees are fair, and cover the costs of reviewing, approving, hosting, and promoting developers' apps. Nonetheless, mini-ecosystems for music, videos, and video games are also emerging within the App Store -- and Apple likely wants to control those ecosystems with its first-party apps. Allowing Microsoft and Google to launch their full cloud gaming platforms on iOS would undermine that long-term strategy by pulling gamers away from Apple Arcade.

What does this mean for Microsoft and Google?

Apple's new offer to Microsoft, Google, and other cloud gaming players is arguably better than an outright ban, but it could still cripple their plans to reach iOS gamers -- who account for 14% of the global smartphone market, according to Counterpoint Research.

Meanwhile, Apple could roll out its own cloud-based games on Apple Arcade, which could make it even tougher for xCloud or Stadia to gain ground on iOS devices. Microsoft and Google can probably offset its loss of iOS gamers with the growth of its Windows- and Android-based platforms, but Apple's reluctance to host their full cloud gaming platforms highlights some soft spots in the tech giant's services ecosystem.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Microsoft, and Spotify Technology and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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