Epic Games vs Apple
Image: Fortnite/Epic Games

Apple vs Epic Games: control over app distribution is at the heart of the fray

The discussion is about whether the App Store is a business, so it can be characterized as a monopoly, or if it is an intrinsic feature of the iOS/iPhone experience. There are good arguments on both sides

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On August 13, 2020, Epic Games declared war on Apple. Epic has released an iOS update for Fortnite, its blockbuster game, explicitly violating one of the App Store’s sacred rules: that in-app purchases must use Apple‘s payment system, and only it.

Apple reacted immediately, excluding Fortnite from the App Store and preventing millions of iPhone users from accessing one of the most popular games on the planet – if not the most popular. It was not a surprise; so much so that Epic already had a counterattack prepared: all the papers to file a lawsuit against Apple and a marketing campaign spearheaded by the reenactment, with characters from Fortnite, of Apple’s iconic “1984” commercial.

Directed by award-winning filmmaker Ridley Scott, the original “1984” was a kind of audiovisual manifesto against IBM, the 1980s “big tech”. At that time, Apple was a kind of David trying to overthrow a Goliath dressed in a blue shirt and equipped with bland beige computers. Forty years later, Apple is bigger than IBM ever dreamed of: a trillion-dollar company. From David, it became a giant Goliath.

The “final battle” of that war began on May 3, with the trial of that Epic lawsuit in California. For many, this is the most important corporate case in the United States since the antitrust against Microsoft in the late 1990s.

Epic accuses Apple of abusing its power by monopolizing the apps’ distribution on iOS and charging a 30% fee for any purchase within App Store. Epic asks for the right to use its own payment method in purchases related to Fortnite on iOS and also to distribute the game directly to users, without having to go through the App Store.

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Fortnite’s success justifies Epic’s ambitions. Documents presented in court showed that in its first two years, the game earned $ 9 billion – even being a free game, whose income comes from the sale of virtual items (like outfits for the characters) and battle pass. Fortnite is so big that it has changed the nature and plans of Epic. The company launched a computer game store to compete with Steam, from Valve, a reference in games for PCs, and has already spent more than $ 11 million offering games for free to attract players-consumers. Now, Epic wants to do the same with iOS.

In fact, the discussion is about if App Store is a business, so it can be characterized as a monopoly, or if it is an intrinsic feature of the iOS/iPhone user experience. There are good arguments on both sides.

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Thirty percent to distribute apps and process payments is too much? It’s too little? Another interesting aspect of these imbroglios that end up in court is that they reveal a ton of documents and internal emails from the companies involved, with a lot of details that otherwise unlikely would be made public.

For example, a 2011 email from Phil Schiller, in charge of the App Store at the time, in which he considers a change in the revenue share when the App Store exceeds a $ 1 billion annual profit. Schiller believed that market changes would force Apple to lower the toll to remain competitive, and so he suggested that the company offer the discount earlier than needed, while on top.

Epic demands too that Apple allow apps for iOS to be distributed by other means, and not just in App Store. Currently, an iPhone user can only download new apps from the App Store, which is operated by Apple itself. On Android and conventional computer systems, such as Apple’s macOS, it is possible to have alternative stores and install apps directly (“sideloading”).

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Epic argues that Apple‘s politics harms the market competition and, consequently, iOS users, while generating billion-dollar returns to Apple – an external consultant estimated the App Store’s profit margin at 78%, a very high percentage even by Apple standards. Therefore, a monopoly would be set up.

Apple defends itself saying that the 30% fee was already standing before the App Store and that this level remained after its launch. Regarding the App Store exclusivity, the company claims that the iOS market share is small, and that the unique store model guarantees more security, privacy and reliability. Finally, Apple says that despite all of this, the App Store made it possible for thousands of companies and businesses to be founded or expand through iOS – as it is and always has been.

Almost three weeks after the start of the trial, whoever follows the case closely says that Epic is at a disadvantage and may lose. Some of Epic’s argument weaknesses were exposed, such as the fact that Microsoft and Sony charge the same 30% as Apple in their respective videogames (and Epic doesn’t complain about that, even though the PlayStation is Fortnite’s most profitable platform); or that the player can buy Fortnite virtual coins on browsers and other platforms and consume them on iOS, the so-called “cross-wallet”, which is a way to avoid the 30% bite of the App Store.

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Regardless of the trial outcome, this story will not end there. In recent years, in clear attempts to relieve pressure from partner/rival companies and regulators, Apple has made tiny concessions in its business model. In 2016, subscription apps started to pay half of the fee (15%) by users that paid for more than a year. In early 2021, Apple announced a special program for small developers, those who earn up to $ 1 million a year, to pay a 15% fee.

For Epic, it is still little – even because it has not benefited from any of these concessions. And there are other tech giants against Apple. A week before the start of Epic’s trial, the European Commission, motivated by Spotify, started an investigation against Apple over Apple Music. Swedish streaming accuses Apple of generating a competitive imbalance by charging 30% of subscriptions to streaming apps distributed through the App Store, while its app does not have that cost.

Translated by Carolina Pompeo.