How Apple vs. Epic Games Lawsuit Could Change Everything (and Nothing).
In April of 2020, the Verge posted an article about how Apple and Amazon negotiated the Apple’s App Store cut. While conventionally, it has been reported that Apple took a 30 percent cut of every App Store purchase, the article highlighted how Apple granted Amazon preferential treatment for Amazon Prime Video app and agreed on only taking a 15 percent cut. This report was met with significant backlash from major iOS developers such as Epic Games Games, Spotify, and Match.com, who criticized Apple for its anti-competitive practices.
On August 13, 2020, Epic Games announced that players would receive a 20 percent discount on Fortnite’s in-game currency, V-Bucks, if they purchased it directly from Epic Games’s direct payment system instead of Apple’s App Store payment API and Google Play Store in an attempt to bypass the 30 percent cut from Apple and Google. On the company’s FAQ page, Epic Games has stated that
“Thousands of apps on the App Store approved by Apple accept direct payments, including commonly used apps like Amazon, Grubhub, Nike SNKRS, Best Buy, DoorDash, Fandango, McDonalds, Uber, Lyft, and StubHub. We think all developers should be free to support direct payments in all apps. In operating Fortnite on open platforms and operating the Epic Games Games Store, Epic Games has processed over $1,600,000,000 of direct payments successfully, and uses industry trusted encryption and security measures to protect customer transactions.”
The company’s statement justified using Epic Games’s direct payment system, using other approved apps on the App Store as an example.
However, that very same day, Apple responded to this stunt by removing Fortnite from the App Store for violating Apple’s App Store Guidelines. Epic Games responded to the removal by filing an antitrust lawsuit against Apple and posted a short video mocking Apple’s “1984” Macintosh ad based on George Orwell’s 1984, with Epic Games portraying Apple as an Orwellian Big Brother. Following Fortnite’s removal from the App Store, Google removed Fortnite from the Play Store later that day as well. As a result, Epic Games filed an antitrust lawsuit against Google that same day.
On August 17, 2020, on Epic Games’ court order statement, they announced that Apple has threatened to remove access to all development tools necessary for Fortnite and Unreal Engine from third-party developers by August 28, 2020. Epic Games complained to the court that Apple never stated that the Unreal Engine had violated Apple’s policies and the removal was unjustified. As a result, on August 24, 2020, judge Yvonne Gonzales Rogers granted Epic Games a temporary restraining order, which temporarily prohibits Apple from removing developer access to the Unreal Engine, but not Fortnite.
On August 28, Apple terminated the Epic Games Games’ developer account associated with Fortnite. The removal of Epic Games’s developer account meant that users could no longer download Epic Games Games apps such as Fortnite and Infinity Blade from the App Store. On September 4, 2020, Epic Games filed a preliminary injunction in an attempt to force Apple to reinstate Fortnite on the App Store. Epic Games argued that Fortnite player base on iOS has declined by nearly 60 percent and that 63 percent of Fortnite users on iOS play Fortnite only on iOS devices. However, on the 8th, Apple filed a countersuit against Epic Games for breach of contract and asked the court to award Apple for damages.
On September 28, 2020, Judge Rogers heard arguments from both Apple and Epic Games and recommended a jury trial to settle the case in July 2021. However, on October 9, Judge Rogers also granted Epic Games’s injunction to permanently prevent the Unreal Engine from being removed as retaliation from Apple. Unfortunately for Epic Games, Judge Rogers refused to grant the injunction to force Apple to reinstate Fortnite on the App Store.
So what does this mean for the consumers?
As of right now, nothing changes. Fortnite is still banned on iOS, but you can still play games on the App Store using the Unreal Engine. While Epic Games granted its players a 20 percent discount on their in-game currency before the ban, the cost of production for virtual currency, such as V-Bucks, is next to nothing. In addition to the fact that Epic Games initially charged the same amount on other platforms (such as PC, where they receive 100 percent of the profit) before the controversy, it just appears as if Epic Games Games wanted to gain 10 percent more profit on V-Bucks from mobile Fortnite due to its massive player base. It really makes you wonder if Epic Games would offer the 20 percent discount if Apple and Google did not take any cut on its purchases.
However, once the jury trial in July 2021 determines a winner, we may see massive changes. If Apple wins, Apple will continue taking 30 percent cuts from developers and we may see Epic Games concede and Fortnite reinstated in the App Store. If Epic Games wins the jury trial, it sets a massive precedent for the mobile industry. We will begin seeing more and more developers following in Epic Games’s footsteps and go against Apple and Google. Some of your favorite apps like Spotify and Tinder, might no longer be on iOS or Android. Ultimately, we wouldn’t know the extent of the impact this case could leave on the mobile industry until July.
What does this mean for businesses and developers going forward?
To answer this question, we must first understand what a monopoly is and how exactly Google and Apple are acting as monopolies, seeing how they possess enough market power to charge exorbitant prices. As defined in textbook economics, a monopoly is a single firm with enough market power to charge exorbitant prices. The defining characteristics of a monopoly are high barriers to entry, price maker, profit maximizer (like all firms in classic economic theory), single seller, and price discrimination. With monopolies, there is deadweight loss to be had, meaning market inefficiency.
If we go down the list of these characteristics for Google and Apple, they pretty much hit each point.
It is extremely difficult to enter the market and compete with Google and Apple’s products and app stores. There are no major competitors to the iOS App Store and the Google Play Store due to how the phones are designed and how prevalent they are. The two major operating systems in the phone industry are, of course, iOS and Android, and the primary methods of app delivery for app developers are the App Store and Play Store respectively. This means app developers usually have to go through either Apple or Google to get their apps to actually perform in the app market. Because they’re lone competitors, they control the prices in the market; Apple is the sole seller of iPhones and, thus, the sole controller of the App Store, while Google controls the Play Store and it’s preinstalled in every Android phone. A great example of this would be how Apple has relatively few new innovations with each iteration of the iPhone, and yet people flock to buy new iPhones when they’re released. You can certainly bet that both companies are maximizing profit; just look at their business models and business choices in the past few years. In short, Apple and Google can certainly be considered monopolies because they control not only the main app distribution platforms for mobile app developers, but also the payment processing for those apps.
Putting aside all their other monopoly practices, how exactly is this behavior regarding the app stores anti-competitive? Developers who wish to put their app on either of the app stores must accept the 30 percent cut from Apple or Google, which essentially means that developers are paying to be on the app stores. If developers don’t accept the terms, the apps won’t be in the app stores and users must download the apps elsewhere, such as the developers’ websites. The process of doing so can be rather unsettling and difficult for Android users and much more so for iPhone users. To not agree to the monopolies’ conditions is to give up a large portion of the consumer market and, subsequently, surrender a large amount of potential revenue and prevalence.
Developers can’t make up the lost revenue because they are required to use the payment processing provided by Apple and Google; the cost of the 30 percent cut is either incurred by the developer or passed onto the consumers through increased app transaction costs, both resulting in less revenue. Additionally, the policy terms forbid developers from informing users that they can make app transactions for lower prices on developer websites. It’s definitely not impossible for apps to get big without the help of Apple or Google, but for many developers, it’s certainly much more difficult. Some might think this is still a level playing field because Apple and Google take the 30 percent cut from all developers, but in actuality, it isn’t. Not every app developer can afford the 30 percent cut nor the revenue lost from not agreeing to the terms, so they can be put in very tough situations. Because Apple and Google are promoting a system of an uneven playing field, the companies are being anti-competitive.
To reiterate the original question: what does this mean for businesses and developers going forward? Depending on the results of Epic Games’ lawsuits for Apple and Google, we will see the status quo maintained or a fall or abolishment of the exorbitant percentage cuts taken from developers. Should the status quo be maintained, it is possible many developers will boycott the monopolies’ practices, though it is likely that we will still see many developers continue to use the app distribution platforms due to the fact that Apple and Google control the market for app distribution.
If Epic Games wins the lawsuit and both Apple and Google modify or abolish their terms and practices, releasing an app and gaining traction will be much easier and less costly for app developers. This will likely result in higher quality and quantity for apps on the market. Developers will pay less and, thus, the playing field will be even. However, there are caveats from a change in practices. One example of such would be Apple and Google raising consumer costs elsewhere or changing a different part of their app store policies to cover the new lack of revenue. Given their monopolistic power, it won’t be very difficult for the two tech giants to do so.
As is usual for anything related to business and economics, the outcomes of the lawsuit are uncertain; however, from an initial evaluation, it seems most besides the largest corporations (in this case, Apple and Google) will largely benefit from Epic Games winning the case. Epic Games’ intentions for suing Apple may be partially ambiguous, but a largely positive outcome still remains for consumers, small developers, and the competition of the market as a whole.
