Apple and Epic head to court over their slices of the app pie

Apple and Epic Games, maker of the wildly popular game Fortnite, square off this week in a trial that could decide how much control Apple can exert over the app economy.

On a Friday in August, Tim Sweeney, a billionaire game developer, sent an email to a contact at Microsoft: “You’ll enjoy the upcoming fireworks show.”

A week later, Sweeney’s game Fortnite delivered good news to players on iPhones: They would get a discount on items in the game if they completed the purchases outside Apple’s payment systems.

The change violated Apple’s rules and cut the iPhone maker off from collecting a commission on one of the world’s most popular games. Hours later, Apple kicked Fortnite off the App Store.

Sweeney’s company, Epic Games, immediately sued Apple in federal court. It also began a public relations broadside that was months in the works, complete with a trending #FreeFortnite hashtag and a parody of Apple’s iconic “1984” ad depicting Apple CEO Tim Cook as an evil corporate overlord with an apple for a head.

Epic’s attack was the most direct challenge to Apple’s power in years, and nine months later, the fight is heading to federal court in Oakland, California. On Monday, a trial is scheduled to open with testimony from Sweeney on why he believes Apple is a monopoly abusing its power.

The trial, expected to last about three weeks, carries major implications. If Epic wins, it will upend the economics of the US$100 billion app market and create a path for millions of companies and developers to avoid sending up to 30 per cent of their app sales to Apple.

An Epic victory would also invigorate the antitrust fight against Apple. Federal and state regulators are scrutinising Apple’s control over the App Store, and on Friday, the European Union charged Apple with violating antitrust laws over its app rules and fees. Apple faces two other federal lawsuits about its App Store fees — one from developers and one from iPhone owners — that are seeking class-action status.

Beating Apple would also bode well for Epic’s upcoming trial against Google over the same issues on the app store for Android devices. That case is expected to go to trial this year and would be decided by the same federal judge, Yvonne Gonzalez Rogers of the Northern District of California.

If Apple wins, however, it will strengthen its grip over mobile apps and stifle its growing chorus of critics, further empowering a company that is already the world’s most valuable and that topped US$200 billion in sales over just the past six months.

The trial will centre on a legal debate over whether Apple is a monopoly. Epic’s lawyers have argued that companies need iPhones to reach customers and that Apple unfairly forces app makers to use its payment system and pay its fees.

Apple’s lawyers have responded that iPhones are merely one way to reach consumers and that Apple’s fees are in line with industry standards.

Apple probably has the upper hand, legal experts said. Courts are often more sympathetic to defendants in antitrust trials, since companies have a right to choose with whom they do business.

But Epic is arguing that Apple is using its position of power to stifle competition, a legal theory “that has worked and overcome that disadvantage,” said William Kovacic, a law professor at George Washington University. The Department of Justice made a similar argument against Microsoft in its antitrust suit two decades ago.

The case might come down to one narrow technical question: What is the market these two are fighting over? Epic argues that the case is about iPhones and that Apple has a clear monopoly on them. Apple lawyers insist that the market in question includes all gaming platforms — from smartphones to video game consoles to desktop computers — and that Apple hardly has a monopoly there.

The answer will be up to Gonzalez Rogers. And after she decides this case, she is set to hear the next two App Store lawsuits seeking class-action status.

An Apple spokesperson said in a statement that Apple’s top executives would show how the App Store had been good for the world. “We feel confident the case will prove that Epic purposefully breached its agreement solely to increase its revenues,” she said.

Epic declined to comment.

Fortnite, a battle royale video game, is the biggest hit of Epic’s 30 years in business. It got there, in part, because Sweeney pushed the companies behind the big gaming consoles — Microsoft, Sony Group and Nintendo — to let players battle each other across different devices, meaning a Microsoft Xbox owner could play a Sony PlayStation owner for the first time.

In 2018, Epic released Fortnite in an iPhone app. In about two years, Epic earned roughly US$1 billion from Fortnite and its other iPhone apps. But it had to pay about 30 per cent of that to Apple. Epic was paying similar commissions to the gaming console makers.

Sweeney has said in interviews and on Twitter that he realised the app store commissions meant that Apple and Google could sometimes profit more on a game than the developers who had made it. He saw an opportunity to challenge the tech giants.

Sweeney has also said he was OK paying commissions to companies such as Microsoft and Nintendo because they sold their gaming consoles at or below cost and depend on the commissions, while Apple earns wide margins on all parts of its business.

Other makers of apps were also starting to complain about the app stores, but Epic was one of the few with the money, willingness and independence to take on a fight in court. While Chinese internet giant Tencent bought a large chunk of Epic in 2012, Sweeney remains the controlling shareholder. Investors recently valued Epic at US$29 billion.

But Epic is still tiny compared with Apple. In its latest quarter, Apple averaged about US$30 billion in revenue a month.

“If we let Apple and Google get away with this, in a few years they’re going to extend that monopoly to exercise a degree of power over people and companies which is completely unprecedented in human history,” Sweeney said in an interview last year.

In 2019, Sweeney decided to confront Apple. Epic hired law firm Cravath Swaine & Moore, tapped a public relations consultant, assigned 100 to 200 employees to the project, and created an alliance with other app makers “to ensure we’re not the only voice,” according to an Apple court filing. Epic named the effort Project Liberty.

In June, Sweeney emailed Cook and a few of his deputies, asking to release a competing marketplace for games on the iPhone and to use Epic’s own payment system instead of Apple’s, enabling it to circumvent Apple’s 30% cut.

Apple’s lawyers responded, writing that the company would not turn the App Store “into a public utility.”

Sweeney dropped the civility in his response. “It’s a sad state of affairs that Apple’s senior executives would hand Epic’s sincere request off to Apple’s legal team to respond with such a self-righteous and self-serving screed,” he wrote to Cook. “We will continue to pursue this, as we have done in the past to address other injustices in our industry.”

Three weeks later, Sweeney sent his forecast for fireworks, according to an Apple court filing.

Since then, lawyers for Epic and Apple have been telling different stories in court filings and to reporters.

Apple has said it developed a world-changing product in the iPhone that led to an “economic miracle” in mobile apps. Apple has spent billions of dollars developing the iPhone and another US$100 million on its App Store, the company said, and charging a commission on app sales is partly how it recoups that investment and keeps apps safe.

Epic has countered that Apple’s commissions do very little for security. Epic is expected to call witnesses from other companies to testify on their experiences with the App Store, including an executive at Match Group, which makes Tinder, a dating app. An executive at Facebook, which is locked in its own feud with Apple, had been scheduled to testify but dropped out.

Apple has accused Epic of looking for a free ride. The game maker has not gone after other companies that distribute Fortnite. Microsoft, Samsung, Sony and Nintendo all charge the same commissions on games, according to a study funded by Apple. That study did not note that Apple popularised the 30 per cent rate with the App Store in 2008.

In response, Epic has pointed to the commission it charges in its own marketplace for game developers: 12 per cent.

After Epic sued, Apple halved its commission to 15 per cent for developers that make less than US$1 million on their apps. That new rate applies to about 98 per cent of the developers that paid Apple’s commission, according to estimates from Sensor Tower, an app data firm.

Yet it hardly affected Apple’s bottom line. According to Sensor Tower, more than 95 per cent of Apple’s app revenues come from companies paying the full 30 per cent rate.

Written by: Jack Nicas and Erin Griffith
Photographs by: Brian Finke and Travis Dove
© 2021 THE NEW YORK TIMES

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