Introduction
While the idea behind both Intellectual Property and Competition laws is a shared vision of promoting innovation and fair competition to ultimately serve consumer interests, the two often find themselves in conflict. This is because IP confers exclusive rights upon the owner, which can in turn keep away competitors. The e-sports market stands at an interesting and crucial juncture between the two, being a multi-sided platform market relying on IP.[1] On the one hand, there is the game publishers’ right to do as they please with their creation, but on the other hand, this gives the publisher control over the entire downstream market for e-sports. This can give rise to an abuse of dominance on the part of publishers in form of, for example, refusal to license their IP. Rationally, this is more likely to occur when publishers vertically integrate and compete directly with tournament organizers and broadcasters. This post is meant to serve as a brief and simplified analysis of the antitrust concerns that could arise in this context, and possible solutions such as compulsory licensing of the publisher’s IP.
The E-Sports Market
E-sports is a rapidly growing industry across the world; in India, it is expected to grow into a billion-dollar market.[2] Prominent e-sports include League of Legends, Overwatch and StarCraft.[3] Generally, e-sports consists of footage of professional players playing video games before an audience, with elements of traditional sports such as interviews and highlights added.[4] However, e-sports’ fundamental features set it apart from traditional sports events like football or basketball; nobody owns football, basketball or cricket; but games like League of Legends are owned by the publisher of the game.[5]
Tournament organizers, broadcasters, advertisers, players, teams and viewers all form a part of the esports market.[6] Each of them needs the publisher’s IP to compete in the market, and this concentration of monopoly power with the publishers gives them the ability to control the downstream conduct of all stakeholders. For example, Riot (which owns League of Legends) could refuse to license its game to broadcasters and choose to broadcast the e-sports content on its own.[7] Or, it could impose unfair conditions in the license agreements.
This is leads us to an important point of discussion: how such conduct could emerge, i.e., the rationale behind it. For this, one needs to understand a salient feature of the esports market structure: the vertical relationship between esports publishers and other entities including tournament organizes and broadcasters. Esports publishers operate in the upstream market, i.e. at an “earlier” stage of production; they can be compared to raw material suppliers. Organizers and broadcasters, on the other hand, operate at a level below the publishers, in the downstream market—comparable to manufacturers and retailers. Therefore, they exist at different stages of the ‘production chain’ of esports and share a vertical relationship, such that the IPR of esports publishers is the ‘raw material’ required by the organizers and broadcasters to compete in their respective markets.
Rationally, a publisher would seek to exclude other broadcasters and tournament organizers when it starts to compete with them in the downstream market.[8] This in turn could help it drive out other e-sports publishers. For example, the publisher of Game A wants it played as an esport. Refusing to license his IP to tournament organizers or broadcasters would make sense only when he himself wishes to organize and broadcast these tournaments.
Now, the publisher can also impose conditions on the players so that they do not play for Game A’s competitors. Suppose there is another firm who owns Game B; this firm exists only in the upstream market and licenses its IP to downstream players. Game B’s publisher would naturally be unable to enjoy the additional profits being gained by Game A, and if the firm is unable to enter the downstream market it may be driven out of the market. Therefore, anticompetitive conduct is likely to arise when the publisher vertically integrates.
Dominant Position in the Relevant Market
The conduct described above best fits S.4 of the Competition Act, i.e. abuse of dominant position. For establishing such a case, the following steps need to be followed: (i) define the relevant market (ii) establish the dominant position of the firm (iii) only if the firm is dominant, analyze its conduct to ascertain whether its conduct is covered by the acts described in S.4.[9] Evidently, before the conduct of these publishers could be characterized as anticompetitive under S.4 of the Competition Act, a detailed market study would have to be undertaken in order to define the relevant market and the establish the dominant position of the firm. The relevant market definition is necessary to set out the competitive constraints operating on a firm.[10]
Some of the factors to be used to define the relevant market have been set out in S.19 of the Competition Act.[11] Arguably most important consideration is demand substitutability; if customers would easily substitute Game A for Game B, then both are competitors in the same market. The relevant market could be the market for a single esport, a genre of e-sports, or all e-sports depending on consumer preferences, transferability of player skills, age demographics of viewers and a myriad of factors depending on the case.[12] Such a market analysis is naturally complicated by network effects, interdependencies and the number of entities involved.
Nonetheless, it important to keep the market definition in mind while analyzing the conduct of publishers since the next step is to establish the dominant position of a firm. For instance, if the relevant market is defined as the market for a single esport, a finding of dominance is easier since the publisher owns exclusive rights to the esport. If the relevant market is broader, however, a finding of dominant would depend on the factors set out in S.19, including market share, size and resources, entry barriers and vertical integration and would have to be taken up on a case-to-case basis.
Vertical Abuse of Dominance
The publishers’ conduct as described could a form of leveraging abuse, under S.4(2)(e). Here, an enterprise uses its dominance in one market to enter/protect/gain advantage in another market. Most of these cases concern a vertically integrated firm that is dominant in an upstream market and refuses to supply a customer in the downstream market where it is also present.[13] In our case, suppose a vertically integrated publisher is dominant in the upstream market for IP licenses, and it uses this dominance to distort competition in the downstream market for broadcast of Game A by, say, charging high prices for the license or refusing the license. Having pushed out competitors, it seeks to strengthen its own position in the broadcast market—this would be a leveraging abuse.
A related concept is that of denial of market access under S.4(2)(c). By not allowing competing broadcasters and tournament organizers the rights to a game, the publisher could be said to be denying them access to the downstream e-sports market for his game. Agreeing to grant the license on unreasonable conditions could also fall under this as “constructive refusal”.[14]
Both these concepts have also been covered under Article 102 of the TFEU, along with limiting technical development.[15] The “essential facilities doctrine” which originated from US Antitrust Law has been discussed under this provision.[16] According to the doctrine, “a monopolist has a duty to provide competitors with reasonable access to essential facilities under his control without which one cannot effectively compete in a given market”.[17] The product must be indispensable for competing in the downstream market, and the refusal should eliminate all effective competition.[18]
Traditionally, the doctrine was applied in cases of access to physical infrastructure such as ports, airports and pipelines; however, recent judgements under Article 102 of the TFEU,[19] have implicitly applied the principle in cases of refusal to grant IP licenses.[20] Magill[21], IMS Health[22] and most recently, Microsoft[23] have laid down principles for compulsory IP licensing in “exceptional circumstances” which resemble the essential facilities test. First, the refusal should relate to a product or service indispensable to the exercise of an activity on a neighboring market; this is similar to the test of “objective necessity of the essential facility”[24]. Second, the refusal should exclude any effective competition in the neighboring market and third, the refusal should prevent the appearance of a new product for which there is potential consumer demand.[25]
For the present discussion, the “indispensable” product is the IP of the publisher. One could argue that the IP is not indispensable for competing in the e-sports market, since the broadcaster could simply turn to a competitor for their IP and use to for e-sports content. However, this holds good only if Game A and Game B are considered substitutable, i.e. part of the same downstream market. Otherwise, the IP is in fact indispensable for the broadcaster to compete in the market for broadcast of Game A e-sports.
The second requirement, i.e. elimination of effective competition, may be more difficult to show since a refusal to deal with a few competitors may not exclude all effective competition; not licensing to any competitors, however, may prove anticompetitive.
The third requirement entails that the enterprise seeking the publisher’s license must prove that it seeks to create a product distinct from the one already provided, for which there is consumer demand. This was emphasized by the Court in cases preceding Microsoft, as there is no right to the license when the enterprise is “duplicating the goods or services already offered on the secondary market by the owner of the intellectual property right”.[26]
This requirement was however relaxed by the General Court in Microsoft, where the requirement was read in the context of “limiting technical development” under Article 102, TFEU.[27] Considering this, it need not be proved that the publisher is hindering the development of an entirely new product, but it may still have to be shown that the license is required for some form of technical development. This brings us to the core point of tension between IPR and Competition Law: should the publishers, then, be compelled to license their IP?
A Compulsory Licensing Scheme?
Some have argued that since vertical integration leads to concentration of the publisher’s market power, it should be regulated.[28] While this may be true, it is also necessary to introduce a system where the stakeholders in the e-sports market can easily obtain IP licenses. It is therefore proposed that by way of legislation, a compulsory licensing scheme for the e-sports market could be introduced, similar to the statutory licensing scheme under S.31D of the Copyright Act[29].
Under such a system, broadcasters would be able to obtain an automatic license to the publisher’s IP by paying the royalty at a rate determined by the concerned authority. Alternatively, the rate could be fixed by the publishers, with the authority intervening only when the rates are unreasonable or likely to have anticompetitive effects. To guard against unfair or unreasonable conditions in these licenses, a provision prohibiting clauses with anticompetitive effects should be included.
It can be argued that a compulsory license would act as a disincentive for publishers to innovate; however, they would still be competing against other e-sports publishers and trying to gain popularity to attract more players, organizers and broadcasters. Broadcasters and tournament organizers would also continue to compete for advertisers, teams, players and viewers. Therefore, they would continue to strive to improve the quality of their product/service. Therefore, even when publishers vertically integrate and compete against tournament organizers or broadcasters, they will continue to offer licenses at reasonable rates. This would ensure that the e-sports market is diverse and competitive, and new entrants are encouraged.
Conclusion
Therefore, E-sports publishers’ IPR poses a significant threat to fair competition and has the potential to foreclose entry of new competitors in the market. Although the e-sports market is an emerging one, there is a strong argument to be made against the publishers abusing their IP rights under S.4 of the Competition Act. This is among a myriad of issues to be faced by the e-sports industry, one of them being the extent of the IPR of the publisher itself which would have to be examined.
[1] Max Miroff, Tiebreaker: An Antitrust Analysis of E-sports, 52 Colum. J.L. & Soc. Probs. 177, 178 (2019).
[2] https://www.forbes.com/sites/suparnadutt/2018/03/09/how-online-gaming-in-india-is-growing-fast-into-a-billion-dollar-market.
[3] Guide: What are E-sports?, BBC (6 Apr. 2017), http://www.bbc.co.uk/newsround/37773832 (Last accessed 20 June 2019, 12:00).
[4] Ibid.
[5] Although there is no specific category for video games under the Copyright Act, 1957 and no judicial precedent for the same (yet), it can be assumed for the purpose of this post that video games could be protected under the Act. An analysis of e-sports ownership is beyond the scope of this post; for a detailed discussion on the point, see Dan L. Burk, Owning E-Sports: Proprietary Rights in Professional Computer Gamin, 161 U. Penn. L. Rev. 1535 (2013).
[6] An Introduction to the E-sports Ecosystem, The E-sports Observer, https://e-sportsobserver.com/the-e-sports-eco-system (Last accessed 20 June, 2019 16:00).
[7] In fact, this is what it does; see Jay Masaad, Riot Korea Announces LoL Park, Will Broadcast LCK Themselves, E-sports Insider (16 Nov. 2017), http://www.e-sportsinsider.com/2017/11/riots-new-lol-park-will-see-seize-greater-authority-lck (Last accessed 20 June 2019, 16:00).
[8] Supra note 1 at 210.
[9] S.M. Dugar, Guide to Competition Act, 2002, 499 (LexisNexis 7th edn., 2018).
[10] R. Whish & D. Bailey, Competition Law, 180 (Oxford University Press 7th edn., 2012).
[11] Section 19(7), Competition Act, 2002; these include end-use of goods and consumer preferences.
[12] For an analysis of single e-sports as relevant market and all e-sports as relevant market see Miroff, supra note 1, pp. 186-205.
[13] Dugar, supra, at 640.
[14] Whish, supra at 716.
[15] Article 102, Treaty on the Functioning of the European Union, https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12008E102&from=EN (Last accessed 29 June 2019); also see S.4(2)(b), Competition Act, 2002.
[16] Dugar, supra at 631.
[17] Ibid.
[18] Whish, supra at 699.
[19] Article 102, TFEU prohibits abuse of dominance under EU Competition Law. S.4, Competition Act is derived from it.
[20] Waller, Spencer Weber, and Tasch, W., Harmonising Essential Facilities, 76 Antitrust L.J. 3 (2010).
[21] [1989] 4 CMLR 757.
[22] [2004] 4 CMLR 1543.
[23] 2007 ECR 11-3601.
[24] Whish, supra at 701.
[25] Ibid, while summarizing existing case law. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62004TJ0201_SUM&from=en, (last accessed July 28 2019).
[26] IMS Health, supra note 22.
[27] Microsoft, supra note 35 at paras 643, 647, 664.
[28] Supra note 1.
[29] S.31D, Copyright Act, 1957.
This blog is a part of the RSRR Blog Series on E-Sports in association with Ikigai Law. By Mohini Parghi, 3rd year, NALSAR University of Law, Hyderabad