Epic’s Tactics Are The System Working As Intended

The most perplexing feature of the commentary surrounding the Epic Games Store (EGS) is that the loudest voices assign criticism to Epic that is more appropriately targeted at Valve. The criticism that has gotten the most attention is the one that says Epic is using its timed exclusives in order to take over digital distribution, the most recent example [at the time the article was written at least] being this opinion piece from VG24/7. Whatever the merits of the two platforms may be, the damages being claimed under a hypothetical Epic monopsony have been the status-quo for digital distribution under Valve right up until the EGS launched.

Competition law exists to protect the benefits of consumers through preserving and promoting fair competition. To illustrate anti-competitive practices, the VG24/7 article cites Amazon’s competition with — and acquisition of — diapers.com, or, more precisely, its parent company Quidsi. The account is most likely drawn from Brad Stone’s The Everything Store: Jeff Bezos and the Age of Amazonthough it differs in a few key aspects. It is highly unlikely the company was “extremely profitable” as the article claims, and the company was run by Amazon for 6 years before being shut down due to a lack of profitability (though this reasoning is disputed). Technicalities aside, it is true that Amazon competed intensely with the fledgling retailer, acquired it for $545 million (the fourth largest acquisition it had made at the time), and this behaviour drew the attention of the US Federal Trade Commission (FTC).

The FTC likely was concerned about Amazon’s behaviour due to its role as a large established incumbent pricing its goods below cost to drive out a potential competitor, a practice known as predatory pricing. The key distinction between this case and the current store wars between Steam and the EGS is that Amazon was the incumbent attempting to gain market power through driving out competitors (either directly from Diapers.com or its acquisition and integration into Walmart). The EGS is closer Diapers.com in this analogy, with free shipping mapping to lower revenue shares and subsidized prices during the summer sale.

Regardless of who plays what role in the analogy, why is it bad that Amazon competed with and acquired Quidsi if the result is inexpensive diapers? The strategy in predatory pricing is for the incumbent to take short term losses to drive competitors out of the market so that it can raise prices later. Not everyone is convinced that this is a rational strategy since the losses are recouped through raising prices after the competitors have been driven out, and there’s nothing stopping another entrant from employing the same strategy. Similarly, the firms being attacked can acknowledge this practice hinges on their exiting from the market and so can accept the game of chicken and stare down the competitor (Dow chemical did this and actually bought up the under priced goods and sold it back at a mark up still below the predator’s normal price in their home region).

In gaming terms, suppose the worst accusations against Epic are true and they succeed in driving Valve out of digital distribution. What is to stop a consortium of EA, Activision-Blizzard, Ubisoft, and Take Two from deciding that they want to own digital distribution and employing the exact same strategy against Epic once it’s catching its breath after taking down Steam? While modern theory does offer examples of rational price predation, none of it offers anything to suggest the EGS is a special case. Tim Sweeny has posted the costs of running the store and they do not exceed the revenues generated from the 12% share, meaning it is not selling below cost.

One might correctly point out that these costs do not factor in the costs of the temporary exclusives, which forms the basis of the objection. Here the EGS is clearly in the right. Not only is exclusivity permitted under antitrust/competition law, such agreements are pro-competitive. The only time such agreements are a concern is when incumbents use them to prevent new entrants from competing, and there are provisions to deal with them. When antitrust cases of this nature do come up, market power and the duration of the exclusivity period are among the factors consider. Epic is a new entrant into the market, while Steam is the largest player. The exclusivity period is for a year, which is considered short term and so unlikely to violate competition law. Because society values the benefits from competition, there are tests for the kind of behaviour we’re seeing in the gaming space, and those tests indicate that the system is working as intended.

Of course, just because something is legal doesn’t mean it is the correct thing to do. But why must gamers assume that Epic is lying when their stated goal is to break the standard of a 30% revenue share? Epic’s actions up to this point have been entirely consistent with this goal, from refusing to list on Google Play, to building a competing storefront that appears to be succeeding in a way that alternatives (including Amazon’s Twitch) have not.

The claims that Epic’s behaviour is anti-competitive are misinformed at best, disingenuous at worst. Consumers should instead look to how Steam’s behaviour has changed in response to the competition. Valve has been more talkative since the introduction of the Epic Store and have been making efforts to deal with complaints like review bombing. The introduction of Steam Labs shows how much Valve has been sitting on in response to long standing complaints like discoverability. Without the introduction of the EGS, it’s anyone’s guess as to when, or even if, these features would have been rolled out. A sufficiently dominant player can afford to under-invest in innovations like these, and Steam’s long overdue adoption of refunds shows an established track record of profiting from this lack of investment.

Despite the editorials, boycotts, hate mail, and angry tweets, one outcome of the entry of the EGS will be a better Steam. The correct criticism of Epic has always been on a lack of features, not the spectre of some future where Valve quits because it finally needs to surrender some of its profit margins. If Epic wants to dominate digital distribution, they’ll have to earn it, and it’s time that consumers asked Valve to do the same.

Note on affiliate links: I am a member of Epic’s Support-a-Creator Program for which I am given a portion of sales for traffic I drive to the site or which contain the creator tag SYSTEMCHALK. I didn’t include any links here, but let me say that: 1) It’d be super if you used it, and 2) Epic would need to pay me Borderlands 3 money for this to be a paid editorial. In this case, I’m the devil’s advocate working pro-bono.

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