Apple’s Reckoning Has Come. Epic Games vs Apple and Google

If you want to install an iPhone app, you must get it through the Apple App Store where Apple charges developers 30% on all digital purchases. Well, Epic Games thinks that's bunk. So in August, they sued both Apple, and Google for that matter, who also charges 30% on the Play Store, alleging monopolistic practices. If Epic can convince a judge that the Apple tax must be reduced, or that iOS should allow competing app stores, it would be a huge boost to app developers' bottom lines, including Epic Games.

So is this just a silly slap fight between giant billion dollar, sorry, excuse me, Tim Apple, trillion dollar corporations? Or is it a conflict that may just shape the future of digital content platforms?

The reason this conflict is so important is because no matter what you think of Epic Games, their CEO, Tim Sweeney and his sassy tweets, or Tencent's stake in its company, a win for Epic here could essentially mean the death of the walled garden ecosystem altogether.

Imagine it. A future where iPhones, and iPads for that matter, could have multiple app store, sideloading of apps, or even custom operating systems without jailbreaking. And you might think, "Well, gosh, that sounds great," but Apple doesn't. Which is why in the lead up to the full hearing on September 28th, they'd been fighting this lawsuit tooth and nail, and it's gotten pretty nasty.

It all started on August 13th when Epic snuck, a new payment option into an update for the iOS and Android versions of Fortnite that allowed players to purchase V-Bucks, the in-game currency, directly from Epic at a discount rather than buying them at full price using the store's built-in payment processors. This is forbidden by store guidelines, so Apple immediately removed Fortnite from their store and for that matter, so did Google. But of course, it was a trap. That very day, Epic fired off 60-page lawsuits to both companies alongside the release of a short film parodying Apple's infamous 1984 ad. You know, the one that portrayed Apple as the agent of change breaking IBM's monopoly over the computer market. In Epic's version titled Nineteen Eighty-Fortnite, ha-ha. Apple has taken IBM's place as the monopolistic bad guy with the Brite Bomber Fortnite character replacing Apple's idealistic running. - Prevails.

In a nutshell, Epic's argument is that Apple's practice of forcing developers to A, distribute iOS apps only through the App Store, and B, only use Apple's own in-app payment option constitutes a monopoly. Android allows third-party app stores and allows app sideloading, but Epic are used there that Google makes those options prohibitively difficult to use at scale effectively shutting out any real competition. More on that later.

After the suit was filed, Google mostly remained quiet while Apple and Epic filed multiple injunctions and counterclaims against each other, including a particularly petty threat from Apple that would have inflicted unnecessary damage on third-party developers who just happened to use Epic's Unreal Engine for their own games.

The bottom line is, Epic wanted a judge to force Apple to reinstate Fortnite while the suit proceeds while Apple sought damages against Epic Games for breaching a contract that they obviously entered into willingly. Which if you think about it, it's kind of a fair point. Why would Epic risk the revenue that they were getting from Fortnite players on iOS, a third of the game's player base accounting for tens of millions of dollars per month, for this expensive and precarious legal fight? What is Epic after here?

Well, Epic wants the opportunity to directly compete with Apple services on iOS by either offering their own in-app payment option or by even launching their own iOS App Store, presumably for gaming. And they don't just want this for themselves, they want any developer to have the option to build or use these competing services.

They actually tried to do both of these things on Android. Fortnite's Android version was initially available only through the Epic Games' website, avoiding the Play Store and its 30% cut of purchases. Unfortunately, though, this meant that the game wasn't nearly as accessible to less technically savvy Android users since Android requires changing system settings and dismissing scary malware warnings in order to install non-Play Store apps. Oh, and then there was also the problem of actual malware-infected copies of the game being out there on the web.

Eventually, at least the way Epic tells it, they were more or less forced to release Fortnite on the Play Store. Now they also tried making deals with OnePlus and LG to preload an Epic Games launcher onto those company's foams, but Epic claims Google stepped in and blocked those deals from happening. Epic claims that this behavior, together with the nine or so extra steps that users have to take to sideload Android apps, constitutes Google's version of a monopoly.

You'd think that Epic having been shut down by the biggest tech giants in the world would just lie down and play by the rules. But that's the weird thing. It doesn't seem, to me anyway, like Epic is just trying to make a few extra bucks here. Although, as we've said, they certainly are trying to do that. It seems like the company is actually trying to affect industry-wide change that would benefit all the developers, not just them.

PC gamers are especially well acquainted with their Epic Games Store and accompanying shenanigans, and it was pretty frustrating to see them snatch EGS-exclusives away from Steam. But Tim Sweeney maintained all that time that the goal of that disruption was ultimately to get more revenue to developers. And his story kind of checks out. The Epic Games Store could still compete with Steam if it took our 25 or 20% cut, but it takes a 12% cut only with further discounts actually given to Unreal Engine Games, and that's compared to Steam's 30% cut. And hey, actually, now that we bring it up, there's that 30% number again. So yeah, it turns out that that's just a standard cut found on basically every major digital platform, including the App Store, Google Play, the Microsoft Store, all the major consoles, and even otherwise physical stores like Best Buy and Walmart. And, I don't know, what's wrong with that, right? A 30% cut leaves 70% for developers.

Well, yes, but also no. Between platform fees, licensing, and other infrastructure costs, developers can sometimes take home way less.

So, of the sales of an app in the UK: 30% goes to the store, 22% to tax, and 48% to the developer - making creators minority participants in the own work. Everyone is paying Apple’s taxes except Apple! https://t.co/2papsFJ3tv

— Tim Sweeney (@TimSweeneyEpic) September 2, 2020

You see that standard 30% store cut is actually really old, and comes from a time when most goods were physical rather than digital and needed to be inventoried, warehoused, picked, packed and shipped.

Well, nowadays, there's a case to be made that the distribution of digital goods doesn't require nearly as many resources. So stores could make do with a much smaller cut. But of course, the incumbent stores, including Apple, obviously don't want that to happen.

In 2019, Apple's cut of digital content sold on the App Store accounted for an estimated $18.3 billion, with a B. And in earnings calls, the company includes the App Store and its services category, along with products like Apple Music, Apple TV+, Apple News+, and Apple Arcade. So that 18.3 billion accounts for nearly 40% of Apple's services revenue justifying Apple's investment into other more prestige products like Jennifer Aniston and Steve Carell. So Apple, Google, and all the rest are in no hurry to give up that 30% cut, and the only way anything is gonna change is through a legal attack like Epic's.

So how strong then is their case? Well, it's gonna come down to how the judge ends up defining a monopoly. Apple does not have a monopoly on mobile devices.

US Smartphone Quarterly Market Data (2019Q1 – 2020Q2)

Source: counterpointresearch.com

iPhones actually account for under 50% of the market while typical monopoly cases in the past have dealt with much higher market shares, say around 80 to 90%.

But as we've said, Epic sued both Google and Apple, and will be making the case that the two of them actually constitute a duopoly. And the argument starts to look stronger here because with so few players in the space, it's very easy for these companies to have an unspoken agreement to just not rock the boat so each of them can maintain control over app distribution and the in-app payment methods on their respective platforms.

For Apple then, the crucial objective will be to convince a judge that an iPhone is fundamentally unlike general computing devices, like PCs and Macs.

Steve jobs hold the New York Times in 2007 that he doesn't want people to think of the iPhone as a computer. I mean, you don't wanna install a bunch of weird third-party app store things on your phone and then have it not work 'cause it got a virus, right? You can't miss that business call.

So from the get-go, Apple has seen iOS, the App Store, and Apple's own in-app payments as simple elements of one product, the iPhone, not separate products in a market. So a judge might think that Epic's argument that Apple has total control over the iOS app distribution market is nonsensical 'cause of course they do. That's iPhone, baby.

Furthermore, Apple might argue, developers are all treated equally on the App Store, and all of the other app developers are abiding by these same guidelines to the mutual benefit of everyone involved. The problem is, well, that's just not true. Amazon Prime Video and other high profile apps have negotiated their way to paying Apple only 15%. And then there's Apple's strange distinction between apps that provide primarily digital or primarily physical goods.

For example, Uber and Airbnb provide real-world services, so they are actually allowed to include direct payment options in their iOS apps. You can just plug your credit card number in. But then games like Fortnite and other apps that only provide digital services must use Apple's in-app payments. This leads to a kind of absurd situation where some apps, like Netflix, for example, avoid paying the Apple tax by removing the ability to sign up for services in-app and just redirecting users to their website. But then, email app, HEY, use that same strategy and ended up getting removed from the App Store for guideline violations only to then be reinstated once it added a two-week free trial using a temporary email address. I mean, I guess that's that classic Apple simplicity, right?

So if Epic were simply asking for special treatment, it actually wouldn't even be that out of the ordinary. but they're not doing that. They're trying to change the situation on iOS and on Android for all developers. It's an incredibly ambitious undertaking and maybe even a foolhardy one.

Most legal analysts say that the law, as it stands now anyway, is not on Epic's side. But that's where the other prong of Epic's two-pronged assault comes in, the people. Fortnite players have been mobilized against Apple here and even some large companies have come out in support of Epic's overall goal. A huge consortium of influential news publishers wrote a letter calling for Apple to drop the 30% fee down to just 15%. Microsoft wrote a letter asking Apple to not revoke access to the Unreal Engine for developers, and Facebook even submitted an update to their app drawing attention to Apple's 30% cut. Needless to say, Apple rejected Facebook's update calling the bit about the 30% cut irrelevant information. Hmm. You don't say.

Now, full disclosure, our sister company, or one of them, Floatplane has actually had its own clashes with Apple and their App Store policies in the past. But that doesn't mean that I'm completely against them here. Apple deserves compensation for building and maintaining an ecosystem that is unlike anything that came before it. And as Apple will surely point out, the App Store has created from nowhere a whole industry for developers where there was none and provides exposure that many small developers simply couldn't afford to pay for through direct marketing. And there are even consumer benefits. Direct ones, like the fact that the App Store has by and large done a pretty good job of keeping malware off of iDevices over the years, and indirect ones as well.

iPhone users love rubbing their five to six years of software updates in the faces of us, Android plebs, who are lucky to get two or three years. Guys, that ain't an accident. Most Android phone makers only make money at the time they sell you the device or by serving you intrusive ads after the fact. They are financially incentivized to sell you more phones more often. By contrast, Apple certainly makes money when they sell you a phone, but they also continue to enjoy an ongoing revenue stream for as long as you keep using your device, greatly increasing their motivation to keep it working for as long as possible, so you can keep buying Candy Crush gold bars or whatever it is you spend your money on.

So those are all reasons that I think most developers and consumers would actually want to continue to use Apple's official App Store, even if an alternate one existed. So the real goal here seems to be to force Apple to lower their cut either by negotiating with them directly, which was actually Epic's first strategy, or by forcing them to allow third-party stores, which would then undoubtedly try to woo over customers with lower rates, incentivizing Apple to compete with them.

So Epic figures Apple is abusing its powerful position, and Apple says, "My playground, my rules." Which in fairness, does kind of sound like abusing your powerful position. But I'm not a lawyer and neither are you unless you are, in which case, good for you.