After months of preparing, Epic Games finally took Apple in a court trial that could fundamentally change App Store’s makeup. The fight dates back to August last year when Epic game added a direct payment mechanism to its popular game Fortnite, a battle royale game in violation of Apple App Store’s rule.
Following that, the iPhone maker quickly removed the game from the App Store. Epic quickly responded with an antitrust lawsuit to establish the App store as a monopoly. The trial for the case will start on May 3.
There are anticipations that the trial would deliver huge revelations about the inner workings of the world’s most significant and influential companies globally with testimony from Tim Cook, Apple CEO, Phil Schiller, Craig Federighi, Tim Sweeney, Epic CEO, and more.
Today, let’s follow along with everything that has happened so far and legal strategies at work for Epic Vs. Apple.
Where did it all Begin?
While the standoff happened in August last year, we could see the path roughing up since June 17, 2020, when Epic Games joined Spotify in protest against Apple’s App Store fees (1).
Following that, Epic started offering a new direct payment option with mega discounts to get around App Store’s 30% fees (2).
At that time, Epic Stated that ‘At present, there are no savings if players use Google or Apple payment options since they both collect an exorbitant 30% fee on all payments. However, if they lower their fees on payments, we will pass along the savings to players.’
It is also worth highlighting that Epic Games has always been critical of mobile app stores. In 2018, it ignored Google Play completely while launching Fortnite on Android before eventually giving in earlier last year (3).
Following that, Apple removed Fortnite from the App Store, which marked a significant escalation in the feud between both companies. And the removal led to Epic revealing a carefully calculated response series. It includes an antitrust lawsuit to establish App Store as a monopoly and a protest video within Fortnite and Youtube to mock Apple’s iconic 1984 ad, and a call on gaming fans to support its fight against the iPhone maker #FreeFortnite.
Shortly after that, Epic Games pushed the button with its next legal action against Apple kicking off Fortnite from the App Store. There was no doubt that Epic would file a preliminary injunction against the tech giant to force it to bring the game back on the App Store (4).
You may remember that by that point, Fortnite had effectively split into two different games (5).
Undoubtedly, Apple responded with counterclaims for tortious interference with its relationships with its customers and unjust enrichment. The iPhone maker also sought damages against Epic Games for allegedly breaching the contract with the App Store. And the battle between the two continues to this day.
In February this year, Epic Games made a formal antitrust complaint against Apple to European Commission. Notably, as Epic Games was challenging the iPhone maker, it also sued the tech behemoth, Google, after removing Fortnite from Google Play Store.
Epic is now fighting Google and Apple in the US, EU, Australia, and the UK (6).
The Next Week’s US Trial
Next week, on May 5, Apple and Epic Games will appear in court for a long-awaited legal battle. Epic Games argues that Apple unfairly kicked its mega-popular game Fortnite off the App Store last year and accused the tech giant of exercising an illegal monopoly over the iOS platform.
On the other hand, Apple alleges that Epic Games is trying to break the iOS platform’s security and safety for its gain. Both of them have laid out how they expect to win their cases, and they have also provided a near-final list of the people for testimony. Both parties have filed a revised tentative witness list on April 26.
There is no surprise that the list includes heavy names from both Apple Epic with their executives and other employees. It includes Tim Sweeney, CEO of Epic Games, who appears on both witness lists, Tim Cook, CEO of Apple, who appears only on Apple’s list, and other big names such as Eddy Cue, Phil Schiller, and Craig Federighi (7).
Additionally, Apple and Epic Games are also preparing to call on outside parties who have a stake in the gaming world and app. Both lists include Lori Wright, the executive of Microsoft Xbox.
iOS isn’t Exactly Fortnite’s Cash Cow
We learned that Fortnite’s iOS version is a huge revenue driver for Epic Games earlier this month. Notably, the game earned over 700 million USD from iOS customers for more than two years before Apple kicked it off from the App Store. According to the court documents released recently before Epic Game’s trials against Apple (8).
However, even though iOS Fortnite players offered a staggering revenue for Epic Games, it is not the biggest platform for game revenue. Notably, it may even be among the smallest.
As per court documents (9), PlayStation 4 generated more than 46.8% of Fortnite’s total revenue from march 2018 to July 2020. Whereas Xbox One, the second-most popular gaming platform, generated more than 27.5% of its total revenue.
Interestingly, iOS ranked fifth, with only making about 7% of its total revenue. The remaining 18.7% revenue is most likely split between Nintendo, Android, Switch, and PCs.
Last year, there were projections that iOS revenue would be even smaller, with merely 5.8% compared to 24% for Xbox One and more than 40% for PlayStation 4 as per a new deposition of David Nikdel, a senior programmer of Epic Games. He works on Fortnite’s backend services.
However, it is not entirely surprising that iOS makes the lowest revenues than other platforms based on previous comments from Tim Sweeney. In a declaration, he had stated that iOS Fortnite represented 10% of the game’s total average daily players in the two years, from the launch of the game to when Apple removed it from the App Store in August 2020.
It is also worth highlighting Fortnite itself is a billion-dollar business on its own. According to reports, in 2019, it brought in over 1.8 billion USD in revenue by itself. The company had projected total revenue of 3.85 billion USD last year to give you a brief idea about how big Fortnite is compared to everything else Epic Games does (10).
With several court documents released ahead of the trial, we now have a better idea about where Fortnite is making most of its money (11). Even though there has been a huge amount of money flying around mobile games these days, Xbox and Playstation seem to make the bulk of Fortnite’s earnings. It makes Epic’s choice to fight Google and Apple more sensible since even if these app stores alienate the company, it can still bank on Sony, Nintendo, and Microsoft consoles and rake in cash.
What would Decide the Prolonged Battle?
Next week, Fortnite developer Epic Games will finally have its day in court where it would force Apple to defend kicking off its Fortnite game from the iOS App Store last year.
The antitrust lawsuit Epic Games has filed is bigger than a single game (12). It is a direct challenge to the App Store model, making it the most significant legal challenge the iPhone maker has faced since the Xerox days (13).
Earlier this month, both sides had filed a document (14) called a ‘proposed findings of fact.’ The document essentially lays out every factual claim they will rely on in their arguments. These documents run more than 65 pages and offer a detailed roadmap of how each side sees the case. It includes everything from the early days of the iPhone to Epic Games’ specific preparations to pick a fight with Apple (15). However, the filings also bring the case into focus, raising questions central to the trial over the forthcoming months.
Is an Exclusive App Store an Inevitable Part of iOS?
The main dilemma of the case is the so-called App Store tax where Apple collects a 30% surcharge on purchases made via the App Store. Apple had kicked off Fortnite from the App Store for dodging that tax as it installed its own payment system, which is forbidden according to App Store rules.
Now, Epic Games is making the case in court that the tech giant should never put these rules in place.
Market Power Abuse and Legal Monopolies
We often hear that it is a case about whether the App Store is a monopoly or not. However, Epic Games argue more subtly than that. It is drawing on antitrust ideas on market power abuse and legal monopolies.
As Epic Sees it, while Apple’s monopoly over the iOS platform is legal, it uses the market power from the monopoly to dominate the second market to distribute apps. The developer compares the situation to Microsoft’s antitrust case in the 90s, a legitimate monopoly over Windows that was extended illegally to the secondary market in internet browsers.
While it is a good theory, it would only make sense if one sees the App Store model as fundamentally different from iOS. In its statement of facts, the iPhone Maker has described the exclusive App Store as a fundamental part of the iPhone, a part of the broader offering that makes its products more valued.
In its filings, Apple claims that the company wanted to ensure that iOS devices are protected from those instability issues, malware, and quality issues. Apple Store exclusivity is part of that and other security measures such as the code-signing and hardware root-of-trust systems. On the software end, there is also a range of private API and OS-level entitlements that are enabled only after a review from the App Store, which ties the systems much tighter together.
Moreover, it is inconvenient to argue that Google is offering a competing mobile OS with none of these restrictions or, to say nothing, of Apple’s macOS, which allows side loading. It is clear that technically it is possible to allow competing for app stores on iOS. However, the question is whether the court would see it as changing Apple’s business model or modifying iOS itself.
The Difference Between The iPhone and A Playstation
One of the most significant challenges for Epic Games is that the App Store model is quite widespread. Gaming consoles such as PlayStation and Xbox operate on the same playbook, offering digital games via an open but curated digital store locked to the hardware and under the manufacturer’s control. Although that alone does not make it legal, it does add credence to Apple’s claim that the App Store restriction is not trapping consumers. If one doesn’t want to play Fortnite on an iPhone, one can play it on a PC or console. Several devices come restricted into a specific distribution channel, while some don’t, and offer users a chance to vote with their feet.
A Different Business Model for Video Game Consoles
To counter this argument, Epic Games has explained in its filing that video game consoles operate under different business models compared to smartphones. It added that development for console games is expensive and slow work. Consoles are useless without a steady supply for games, which keeps console manufacturers under immense pressure to attract developers. It means the hardware itself is usually sold at cost, which leaves App Store commissions as the primary profit source.
Epic further argues that Apple is different since most of its profit still comes from iPhone sales. Its filing states that developers don’t participate in those profits even though apps availability contributes considerably to these device sales.
On some level, we can also boil down the argument that console companies are nice developers; hence their platform power is not an issue. The constant competition between PlayStation and Xbox allows game developers to leverage and extract more favorable terms.
On the other hand, Android and iOS don’t compete for app developers similarly. Plus, the lower cost involvement with mobile app development means that competition happens there vastly on different terms. Apple has offered people a lot of reasons to purchase an iPhone. It means that there are fewer pressures on any given business line. At the same time, it is also short of standard monopoly power, and Apple can easily come away from the console comparison while still looking good.
The Control Apple Exert Over its Devices
If we overlook everything else, Apple is still facing a profound question of how much control it can exert over its hardware. It is Apple’s most primary sin for critics, using graphic and industrial design to attract customers into a walled garden and then locking the gate. For fans, Apple is a genius that integrates hardware and software to offer a more powerful and purposeful user experience. However, it all rests on the tech giant’s ability to keep a closed stack through hardware integration to control what happens with the software.
While it is highly unlikely for the trial to undo that stack, it can limit what Apple can do with it. The feud between Epic Games and Apple had started with payment processing. However, the same legal standard can allow alternative app stores or minimize the iPhone maker’s restrictions on rogue applications such as Parler. It is a first step towards placing regulatory limits on operations of tech companies similar to the regulations on banks or wireless carriers.
At the most elementary level, Epic Games argues that Apple’s ecosystem has grown too prominent and too powerful. It is time for it to be directly accountable to antitrust law.
Hundreds of Apple’s filing pages are filled with the benefits of that system for iPhone owners and developers, and much of it is undeniably true. iOS devices have less malware because of their software controls, even if sometimes scam apps can slip through (16). The system makes a lot of money for iOS developers, many of whom don’t even compete outside of Apple’s locked garden.
The digital distribution shift has allowed developers to save money as they no longer need to distribute their products via brick-and-mortar retail.
However, in a sense, all of that is beside the point. We can’t excuse market power abuse only because one is sometimes helpful. Classic monopolies such as Bell Telephone and Standard Oil also had lots of side benefits. The most important question, in this case, is whether our courts are ready to dive into the mobile software stack and initiate dictating how tech firms can set up their marketplaces. Now that is a tough question. And it will not settle down with a single case or a single ruling (17).
Nevertheless, in one way or another, it is a question our courts will have to take.