In the wake of a global pandemic, many people around the globe have sought the escapism of video games. While a massive economic recession is taking hold, video game giant Nintendo saw a 500% increase in net profits following the popularity of Animal Crossing: New Horizons. The console wars continue with the two other major players in the field, Sony and Microsoft, each releasing their next generation consoles in the Fall of 2020. But these business developments come with questions about the legal implications of the perennially concentrated markets in video game hardware and software.

The Home Console Market

The “console wars,” an ongoing competition between the major manufacturers of console hardware, are as old as home video game consoles themselves. There have always been a small number of manufacturers of consoles, and the last major shift in market participants came with the exit of Sega with its Dreamcast console and the entrance of Microsoft with its Xbox console in 2001. While Nintendo is the oldest major player in this market, the company has largely sidestepped this competition by creating its own niche in family and portable gaming. Many other technology giants have tried and failed to enter this market.

For example, Google, the technology behemoth that has recently entered the sights of the Department of Justice’s Antitrust Division, attempted to enter the console market in 2019 with its Google Stadia game streaming device. Just two years later, Stadia appears to be faltering and moving towards the end of its product life. So why is it that Google, a company that has successfully captured a monopoly share of the general search engine market, unable to break into this industry?

To answer this question, we must look at the last 20 years of console trends. As previously stated, Sega was replaced by Microsoft as a viable competitor in 2001 when the Sega Dreamcast was discontinued and the Microsoft Xbox was introduced. The other two major market shares belonged to Sony and Nintendo.

Home consoles present the unique characteristic of “generations.” Every few years, all of the major console manufacturers release a dramatically improved iteration of their flagship consoles. While Nintendo will sometimes deviate in timing, the other two manufacturers release their consoles during the same year and often in the same quarter. In the past, this pushed the reset button on market share, as consumers would be able to choose which console to purchase without much emphasis on their previously owned consoles beyond brand loyalty. Under those circumstances, it is possible that a Google Stadia or a similar product would have succeeded.

But the spread of digital purchases and cross-generation backward compatibility have changed the stakes dramatically. If someone is a PlayStation 4 owner and is choosing whether to buy a PlayStation 5 or an Xbox Series X/S (the latest generation of these consoles), they are also choosing whether they can continue to play their library of digital game purchases on the new console or not. Microsoft, which sold less than half the number of Xbox as Sony sold PlayStation in the last generation, has sought to mitigate this network effect by introducing their Game Pass Ultimate subscription, which allows consumers to play an extensive backlog of games for a low price. Regardless, the digital purchase issue will likely help Sony maintain a market share lead.

Another issue that leads to brand loyalty is the practice of console exclusives. An Xbox owner will be unable to play certain PlayStation games that are exclusive to the console based on ownership or exclusivity deals. With Microsoft’s recent acquisition of ZeniMax, the massive game studio responsible for the hit game The Elder Scrolls V: Skyrim, there is the possibility of attracting antitrust attention as the company is reportedly seeking other major acquisitions.

However, other network effects are weakening as compared to previous conditions. For example, online multiplayer has traditionally been restricted to people on the same console family as the player. Recently, popular multiplayer games such as Fortnite and Call of Duty have begun to offer cross-platform play, which allows the owner of one console to play with the owner of another brand’s console. This may add to market flexibility.

With these market characteristics in mind, it is unlikely that a new player could enter the home console market in its current state. However, Sony’s dominant market share has not approached a level that has thus far attracted government antitrust intervention.

The Software Markets

PC software sales have recently been the subject of antitrust concerns. One recent target has been Valve, the parent company of the PC game marketplace Steam.

In January 2021, the European Commission fined the video game company Valve € 7.8 million for its practice of restricting cross-border sales of PC games on its Steam platform. While other companies involved in the enforcement cooperated to receive lower fines, Valve continued to dispute the violation, leading to the imposition of the full penalty.

In the US, Steam has been the subject of recent litigation based on a “Most Favored Nation” clause in its agreements with game studios. This prevents game creators from selling the game at a lower price on any other platform. This of course has clear anti-consumer implications, particularly because Steam is the dominant marketplace for PC video game sales. It also creates a “barrier to entry” for any emerging digital game marketplace.

As a result of its very public dispute with Epic Games over the game FortniteApple has been another major target of antitrust litigation. Apple, which charges a 30% commission on all in-app purchases, suspended the game Fortnite from its app store after Epic Games allowed players to bypass the app store and purchase in-game currency directly through Epic’s website. In its lawsuit, which is scheduled for trial later in May 2021, Epic alleges that Apple is abusing its market power by charging high commissions and disallowing alternative payment paths. It is unclear what the result of this lawsuit will be.

Conclusion

Both the hardware and the software markets of video games have been subject to unique and sometimes contentious market conditions. While software markets have received more recent antitrust attention, there is the potential for an increasingly concentrated home console market that could present anticompetitive issues in the future. The Valve and Apple cases should be watched closely for the precedent they create in this rapidly changing industry.

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