Epic, the maker of the hugely popular Fortnite game, has gone to federal court to complain about the high fees and strict rules imposed by Apple in its App Store. Going to the App Store is currently the only way iOS users can get Fortnite and other Epic titles.
Apple requires developers to use its own proprietary payment system to pay for apps and games, and it charges big developers like Epic 30% of their in-app revenue to do so. Apple says it uses the money to provide an easy-to-use and well-organized app store experience, invest in the platform and tools exclusive to iOS developers, as well as offer strong privacy and security measures to prevent customers from being exposed to financial fraud and apps containing malware.
Epic’s case against Apple is highly nuanced and filled with gray areas. It has, to quote The Dude from the Big Lebowski, “a lotta ins, lotta outs, lotta what-have-you’s.” There are strengths and weaknesses to both sides’ main arguments. And with all antitrust cases, the burden lies with the plaintiff—in this case, Epic—to prove Apple’s actions harm competition and ultimately harm the consumer.
These are the main points of the case so far, and why I think Apple has an edge over Epic as the trial heads into its final week.
Tax or Commission?
Apple argues that its 30% commission is the industry standard for digital transactions, and that retail commissions on apps and games have historically been north of 40%. Market forces drove app store operators including Microsoft, Sony, Steam, and Nintendo to converge on that common 30% rate, but just because that is the standard doesn’t mean there isn’t room for improvement.
Developers have been grumbling about Apple’s 30% fee, and the company has signaled a willingness to adapt. The company capitulated somewhat last year by lowering the fee to 15% for smaller developers making less than $1 million per year from their apps. And Apple says 98% of iOS developers fall into that group, meaning the vast majority of Apple’s App Store revenue is being driven by 2% of its developer base.
The open web and more open platforms have allowed for more malware, security, and privacy invasions. Apple has the most rigorous, if imperfect, app review system of any app store, with a rate of less than 2% malicious apps in the App Store. Other app stores are less restricted, but they also allow more malicious apps into their stores with an average of between 25% and 38% depending on the store, according to Apple data submitted into evidence.
A point I believe gets overlooked is that those 30% fees don’t go entirely toward maintaining security and privacy. They also go toward Apple’s investment in its hardware and software tools that directly benefit app developers. This investment is not limited to the number of software development kits (SDKs) and application programming interfaces (APIs) Apple provides to developers. It also includes Apple’s investment in silicon, which vastly increases the capability of Apple’s hardware compared to many other computing systems in the market. The result is better performance and an increase in the capabilities of apps developed for iOS.
Inconsistent rules
However, Epic makes a compelling point that Apple is inconsistent in the way it manages its macOS and iOS app stores. Apple executives would tell you their stringent security and privacy measures apply to macOS as well. But developers are allowed to use third-party payment mechanisms via the web browser in macOS. Users can install apps directly from the developer, sidestepping Apple’s Mac App Store, should they desire. So the main question is: Why is this allowed on macOS but not on iOS?
We are not yet at the point of the trial where Apple has defended these inconsistencies. I’ll be curious to see how Apple explains the difference in developer restrictions between iOS and the more open macOS.
Platform Incentives
One of the more interesting parts of the trial is the commentary of Judge Yvonne Gonzalez Rogers. (Epic and Apple opted out of a jury trial, so Rogers will be the sole decider in this bench trial.) Rogers clearly recognizes that platform providers should make a profit so that they’ll keep investing in their platforms, and thus keep them competitive and attractive to buyers and sellers. This is positive in my view because it is true. If a platform is not allowed to receive any benefit, and sellers on its marketplace are given a free ride, then the marketplace itself would suffer greatly.
Epic has been clear that it doesn’t mind paying app store commissions. What bothers Epic—and perhaps all developers, to a degree—is the commissions app store operators continue to take on in-app purchases after the purchase of the app. Epic’s legal team used the analogy that what Apple is doing is akin to a car dealership taking a cut of the initial sale of the car and then another 30% every time that consumer pays for gas.
But the analogy doesn’t always work. Ninety-three percent of apps in the App Store are free, Apple says, so a commission is not taken upfront. Apple, then, takes its cut only on in-app purchases the user makes after downloading the app. Apple is also quick to point out that 84% of all apps on the Apple app store pay nothing at all to Apple. It is also worth noting that Apple makes most of its app store revenue—65%, according to Sensor Tower—from games, and in-app purchases within games.
Singling out Apple
Another challenge I see in Epic’s overall stance is it has singled out Apple amidst all the other game stores that charge similar 30% commissions and have many, if not all, of the same regulations as Apple. Epic has gone into battle with Apple while still willfully participating in all other game stores from Nintendo, Sony Playstation, Microsoft Xbox, and others. The other particularly curious part of Epic’s stance is that it makes more money from these other game stores than it does from Apple’s, yet it is attacking Apple’s marketplace and not the others.
Epic’s CEO Tim Sweeney has said on the record he believes all game stores exert monopoly power over the distribution of games. This indicates that the change Epic is seeking is not just with Apple but with all app and game distribution platforms. “Epic is not suing for damages,” the company said in its opening argument. “Epic is suing for change . . . not just for itself but for all developers.”
It’s possible Epic is starting with Apple based on the belief that if it wins this case, then the precedent is set and it can force its will on all the other platforms. While Epic states this change is needed for all developers, Epic obviously has grand ambitions for its own game store and payment platform.
It’s about developers
As I’ve listened to Apple’s and Epic’s arguments, I think Apple has the stronger case so far.
If it’s true that Apple could improve some of its app store practices, Epic might not be the best developer to force the issue in court. Epic is a game developer, and consumers have lots of options of platforms and devices to play Fortnite and purchase goods related to Fortnite. I’ve spoken with several leading antitrust professors at top law schools who are skeptical that Epic can win. Spotify, for example, which has been a vocal critic of Apple’s commission related to its service, would likely have been a better candidate to bring a case than Epic. Interestingly, the EU is already going down this path and citing Spotify as a prime example for their case.
Assuming many of the antitrust and legal experts I’ve spoken to are correct and Epic loses this case, I hope that is not the end of the story or the end of the discussion about how best to incentivize developers to innovate. If a better model existed that led to better economics for developers, and more innovative software on a platform like Apple’s, then those changes should be on the table. But a better revenue-sharing model shouldn’t come at the expense of consumer experience, security, and privacy.
To me, cases like this one are frustrating because it sounds like two mega corporations arguing over money when the real discussion should be centered around what is best for software innovation and developer empowerment. But I’m not naive. A productive discussion of those issues isn’t likely to take place in an antitrust court.
Ben Bajarin leads the behavioral analysis and research center at the analyst and consulting group Creative Strategies.
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