The DeanBeat: Apple v. Epic — a briefing on the antitrust arguments and interesting facts

We’re at a huge moment in tech and antitrust history with the litigation initiated by Fortnite maker Epic Games against Apple and Google. While the Google dispute has taken a backseat in the news, the conflict with Apple has gone hot because of that company’s retaliatory strike and a request for a temporary restraining order from Epic.

The conflict began August 13 when Epic announced a discount policy and direct payment mechanism for Fortnite that Apple and Google said violated their respective terms of service. Epic CEO Tim Sweeney has long argued that the 30% commissions the big companies take of every game transaction is unfair and Epic should be able to directly sell its in-app goods to players for lower prices. It argued that app distribution and payment could be as open on Apple’s iOS platform as it is on personal computers.

Apple and Google banned Fortnite, and Apple fired back with the claim that Epic sought to get itself a sweetheart deal other developers couldn’t get. (This was an easily refuted claim, as you’ll see below). Apple said it built the App Store on top of the iOS mobile platform at great financial risk and that Epic was trying to get a free ride now it felt it had paid enough fees. Epic sued both Apple and Google for antitrust and posted a parody video mocking Apple’s stance for freedom in its groundbreaking 1984 ad. Apple then tried to withdraw developer tool support from Epic’s Unreal game engine, which 11 million developers use, and a federal judge granted Epic’s temporary restraining order to prevent that from happening. Microsoft, an Unreal user, supported Epic in the Unreal Engine TRO matter.

A week ago, Epic argued why Fortnite should be allowed to return to Apple’s App Store over Apple’s objections. On September 8, Apple made its case in the U.S. District Court in Oakland, California, arguing that shouldn’t happen and alleging Epic owes damages. We’ve reviewed all of the documents and have summarized the arguments on both sides, as well as salient facts behind those arguments and interesting details about the business. On Wednesday, Epic said Apple will no longer allow users to sign in to their Epic Games accounts using Sign In With Apple, beginning September 11. (Update at 10:47 a.m. Pacific: Apple reversed this decision).

Meanwhile, Google filed a response distancing it from the Apple dispute.

Epic claims it’s leading the charge for all developers and says it can only do so because it isn’t beholden to the tech giants. Fortnite revenue has given the company a valuation of $17.3 billion, and the company recently raised another $250 million from Sony and $1.78 billion from other investors. Apple, whose stock market value is above $2 trillion, is defending itself with rhetoric of victimhood and innovation, while Epic is attacking on the grounds of freedom, openness, fairness, and revolution.

In light of all this, here’s what we found interesting about the filings.

What’s at stake

Epic Games hasn’t asked the court for any damages. It is only requesting that Apple be prohibited from punishing Epic Games for its actions related to the direct payments in Fortnite. Apple has asked for compensatory damages, punitive damages, attorney’s fees, and interest, as well as restitution and disgorgement of all earnings, profits, compensation, benefits, and other allegedly ill-gotten gains Epic obtained as a result of conduct in violation of Apple’s terms of service.

While the dispute started with Epic trying to get Apple to accept an alternative payment system for Fortnite, the conflict is now about the future relationship between game and app publishers and the big companies that control their platforms. Indie developers will be watching closely to see whether companies will still be able to charge fees for the right to publish on their platforms.

Epic’s App Store monopoly argument

Epic argued that Apple is a monopolist in two respects: its control of app distribution on the App Store and its requirement that users pay through its payment processing system.

And Epic argues that because Apple has monopoly power, antitrust laws say Apple can’t use that power to shut competition out of the market for either the app store or the payment system. Epic does, however, acknowledge that Apple created value with the App Store.

“To be clear, Epic does not seek to force Apple to provide distribution and processing services for free, nor does Epic seek to enjoy Apple’s services without paying for them. What Epic wants is the freedom not to use Apple’s App Store or IAP (in-app purchase), and instead to use and offer competing service,” Epic said.

Apple has asserted its store isn’t a separate product, but Epic argues app distribution is an “aftermarket” derived from the primary market of the smartphone platform. Epic says the courts should view the relevant antitrust market as the aftermarket, which has a unique brand and a unique market and is not part of a larger single product. Epic isn’t challenging Apple’s rights on the smartphone platform, only in the aftermarket, where Epic alleges Apple is behaving in a monopolistic manner. It argues that Apple cuts off choices (such as downloading apps from websites) that are available to consumers in other markets. The U.S. Supreme Court is examining this issue of the aftermarket in a case dubbed Apple vs. Pepper.

While Apple doesn’t have a monopoly in the presence of Google’s Android, Epic argued the duopoly has negative effects on the market and that Apple, rather than Google, has the most valuable users. Epic noted that two-thirds of the profits are on Apple’s platform and that Apple has a virtual lock on a billion highly desirable users who spend more than those on Android. In his testimony, economist David Evans argued on Epic’s behalf that the cost of switching is very high for anyone thinking about moving from iOS to Android. It’s basically like starting over.

Google pointed out in its own filing that Android permits multiple stores on the platform and allows users to sideload apps via the internet to bypass the Google Play store. Apple does not allow these actions. (Epic still contends Google engages in anticompetitive actions, such as making sideloading impractical and writing contracts that stop phone makers from having multiple stores on a smartphone.)

Epic said Apple had a 40% revenue share of all smartphones sold from the first quarter of 2016 to the first quarter of 2020. Epic noted that Apple’s iPhones sell for $300 or more, with an average selling price of $790 during this period. Among smartphones that sold for $300 or more, Apple had a 57% revenue share and a 49% unit share. Those aren’t necessarily monopoly market shares, but the question is whether Apple still gets monopoly power because the cost of going with an alternative is so high.

Since Apple cut off Epic’s access to the App Store, Epic has seen a 60% drop in its daily active users on iOS. Epic might never see those users come back. That’s why Epic said it could suffer irreparable harm unless the court acts quickly and issues a temporary restraining order.

Epic’s argument on Apple’s payment monopoly

The payment side is another antitrust battleground. For digital purchases, Apple requires developers to use its own payment service, which is not the case with other platforms, like the PC. But in select cases, Apple permits app makers to use other forms of payment.

Epic pointed out that in the case of app developers who provide physical services, like ridesharing, app makers can use other payment processing systems. Stripe provides in-app payment processing for Lyft. And Braintree handles payments for Uber, among other things. These app developers typically rely on payment processors that are not from Apple or Google because the developer must enable the user to complete a transaction while using the app. But with digital content apps, Apple requires developers to use Apple’s in-app purchase payment processing for in-app transactions. At the same time, Apple allows alternative digital payments when people are using premium video entertainment apps, such as Prime Video, Altice One, and Canal+.

Epic said this is proof that developers have material demand to use third-party payment processing services for in-app transactions in the absence of restrictions Apple has imposed. Epic said users could use alternative payments with much lower transaction fees, such as Amazon Pay, Authorize.net, Braintree, Chase Merchant Services, PayPal, Square, Stripe, and Xsolla.

Apple argues that payments aren’t a separate business; they’re part of a larger business. The company said, “Even setting aside the dispositive law on two-sided platforms, Epic’s factual allegations provide no support for defining IAP as a separate single-sided product market. Where the alleged tied product is an essential ingredient of the overall ‘method of business’ that is sold to customers, courts view them as one product.”

Epic has also argued that Apple acted like a monopolist in rejecting cloud gaming apps that violate its payment system and app distribution monopoly from vendors such as Facebook, Microsoft, Google, and Nvidia. These might become separate antitrust cases, but while those companies have complained, they haven’t taken legal action yet.

Apple threatens the Metaverse

Among other things, Epic said Apple’s removal of Fortnite from the App Store will stunt Epic’s efforts to build the Metaverse, the universe of virtual worlds that are all interconnected, like in novels such as Snow Crash and Ready Player One. Epic describes the Metaverse as a multipurpose, persistent, and interactive virtual space.

Epic said Fortnite already bears many characteristics of the Metaverse, as it “fosters deep community, it’s an immersive experience centered around lasting social connection, it’s a playground to be anybody, yet it’s the most authentic expression of our true authentic selves.” Epic cited the flow of ideas in the social space of the game as a reason it could challenge and perhaps replace Facebook, Snapchat, and others. Epic noted that “major tech companies are focusing on the Metaverse frontier and have made significant investments, and Fortnite puts Epic ahead in this race.”

But Epic said the success of Fortnite’s evolution into a Metaverse depends on having a large user base, which will make interacting there a better experience for potential new users. Epic argued that mobile users are critical to the base. Over 116 million registered users have accessed Fortnite through iOS, more than on any other platform. They have spent more than 2.86 billion hours in the app. By eliminating many of these players from Fortnite and blocking its capability to access over a billion iOS users, Apple could irreparably harm Epic’s chances, and the company says Apple is threatening its ability to create the Metaverse.

Apple simply denied this argument.

Apple’s arguments

Apple criticized Epic for laying the groundwork for its lawsuit in advance, calling it a “sneak assault.” Apple said Epic used “subterfuge” in the form of a “hotfix” to change Fortnite so it could use a direct payment system that circumvented Apple’s cut. Epic technical executives argued such hotfixes are extremely common in the industry and that this wasn’t a case of a digital “Trojan Horse,” as Apple had termed it. But Apple said the hotfix was clearly intended to get around its security and payment system.

While Epic claimed the emergency started when Apple cut off Fortnite and then threatened to unplug the Unreal Engine, Apple called the situation a self-inflicted harm. Apple said Epic could simply return to the App Store with the prior version of Fortnite and pay some commissions while the lawsuit is pending.

“The harm raised by Epic here is completely avoidable — here and now. The asserted harm to Epic customers, whether of Fortnite or Unreal Engine, can be ended by Epic,” Apple said. “All of the users and developers that Epic asserts are at risk are disadvantaged only because Epic’s scheme included breaching its agreements and running into court for relief. Epic has put customers and developers in this position, not Apple.”

Antitrust humor

Apple had some funny writers on its side. It argued that temporary restraining orders (TROs) exist to remedy irreparable harm, not easily repairable “self-inflicted wounds.” Such characterizations are clearly designed to make Epic appear inept or greedy and paint Apple as the real victim.

Apple said, “Epic’s lawsuit is nothing more than a basic disagreement over money. Although Epic portrays itself as a modern corporate Robin Hood, in reality it is a multibillion dollar enterprise that simply wants to pay nothing for the tremendous value it derives from the App Store. Epic’s demands for special treatment and cries of ‘retaliation’ cannot be reconciled with its flagrant breach of contract and its own business practices, as it rakes in billions by taking commissions on game developers’ sales and charging consumers up to $99.99 for bundles of ‘V-Bucks.'”

Apple said Epic took advantage of the App Store for years — including the tools, technology, software, marketing opportunities, and customer reach it provided. Epic was one of the 27 million app developers that found value in creating apps for iOS in order to reach a billion customers in 175 countries. Apple said Epic then turned on it to avoid paying its share.

Apple accused Epic of mounting a “carefully orchestrated” campaign with a parody video and a “prepackaged TRO.” Apple said, “All of the injury Epic claims to itself, game players, and developers could have been avoided if Epic filed its lawsuit without breaching its agreements.” Apple also claimed it was surprised by this action, even though Epic’s Sweeney had warned Apple months in advance.

Apple further argued that complying with Epic’s “emergency relief” would “set off a flood of additional requests for ’emergency’ relief and threaten the entire App Store ecosystem.” It said developers would breach their agreements, jeopardize the security of the App Store, and circumvent payments to Apple, all without consequence. Epic would of course say that’s exactly what it wants to see happen.

An essential facility?

Antitrust law often grants relief to plaintiffs who argue that the defendant denied them the use of an “essential facility,” such as a toll bridge across a river. But Apple argued, “The courts have well understood that the essential facility theory is not an invitation to demand access to the property or privileges of another, on pain of antitrust penalties.”

Apple said Epic claims Apple has denied it access to iOS but that this is “simply false.” Apple noted that even after it removed Fortnite from the App Store, Epic is still making Fortnite sales via existing iOS users. Apple said the App Store is not a public utility and that Epic has no right to reap “all the benefits Apple and the App Store provide without having to pay a penny.”

The App Store — and the idea behind it — has succeeded beyond anyone’s wildest expectations, Apple said. It began with 500 apps in 2008. Since then, the App Store has grown to 1.7 million apps. Apple said its human curators vet more than 100,000 apps a week in 81 languages.

“While Epic and its CEO take issue with the terms on which Apple has since 2008 provided the App Store to all developers, this does not provide cover for Epic to breach binding contracts, dupe a long-time business partner, pocket commissions that rightfully belong to Apple, and then ask this court to take a judicial sledgehammer to one of the 21st century’s most innovative business platforms simply because it does not maximize Epic’s revenues. By any measure, the App Store has revolutionized the marketplace and greatly benefited consumers and app developers like Epic. Apple looks forward to defending against Epic’s baseless claims,” Apple said.

Apple contends that its App Store was built on numerous innovations and that it should be rewarded by being allowed to charge what it wants. It notes that if the innovations were not valuable, it wouldn’t be getting paid so much money by so many developers. Apple also notes that its payment system is the way it ensures it gets paid.

“If developers can avoid the digital checkout, it is the same as if a customer leaves an Apple retail store without paying for shoplifted products: Apple does not get paid,” Apple said.

Apple added that the commission is hardly unique.

“Google’s Play Store, the Amazon Appstore, and the Microsoft Store, and many video game digital marketplaces, such as Xbox, PlayStation, Nintendo, and Steam, all have similar fees and requirements to use the marketplace’s official in-app purchase functionality,” Apple said.

Apple argued it has made big investments in security for the App Store and iOS over the years. If it allowed Epic to enable direct payments inside Fortnite, circumventing Apple’s own payment system, the company said it would run the risk of exposing users to security breaches.

The company said its concerns about Epic’s request were “hardly theoretical.” Apple noted that in 2018, Epic announced the Android version of Fortnite would be available through sideloading, rather than through the Google Play store. Apple said websites appeared to advertise the Android version of Fortnite, but those sites also distributed malware inside the game and Epic failed to police them.

Apple said that by 2019, Epic acknowledged that security vulnerabilities in non-iOS versions of Fortnite exposed hundreds of millions of players to being hacked. Apple said, “Although Apple does not leave it to any developer to keep the iOS platform safe and secure, Epic, in particular, had demonstrated that it could not be entrusted with this type of responsibility.”

Epic has previously called this an exaggeration of the problem related to security.

The facts behind the arguments

Epic argued that it already has evidence users want an alternative app store with direct payments. It said 54% of iOS Fortnite users had used Epic’s direct payments from August 13 to August 27. Incidentally, I wondered why Epic didn’t just sue after Apple rejected an email request for Epic to handle direct payments for Fortnite and circumvent the App Store. Evidently, Epic wanted to demonstrate that Fortnite users had a real desire to use alternatives to Apple, so it made changes to its app via the hotfix to enable the direct payments in Fortnite that led to Apple’s crackdown.

During those same weeks, iOS daily active users of Fortnite declined 60% after Apple cut off further downloads and prevented updates for the app. Epic also said that 63% of Fortnite users on iOS access Fortnite only on iOS.

Apple said it has invested heavily in making application programming interfaces (APIs) for all developers in iOS 14. Apple also said it handles more than 25 million customer support cases a year through AppleCare and handles $500 million in refunds per year. Apple also boasted that the iOS app economy has become one of the fastest-growing sectors of the economy, accounting for more than 2.1 million jobs in the U.S. across all 50 states, up 15% since last year, as part of the 2.7 million jobs Apple supports in the nation.

Apple also pointed out that it doesn’t have a monopoly when it comes to Fortnite. It noted that Epic itself said “of the more than $1.8 billion earned by Fortnite in 2019, less than 12% came from iOS.”

Factual disputes

Apple made a couple of claims that are easily disproven. When players tried to download updates for Fortnite on iOS, or if they tried to download the app after August 13, they saw a message from Apple that said, “The developer has removed the app from the store.” Epic pointed out that this was untrue and that Apple had removed the app. It’s a small point but one that shows how each side is angling to win the hearts and minds of players.

Even more absurd is Apple’s claim that Epic’s Sweeney asked for a special deal. Apple pointed to an email Sweeney sent to Apple CEO Tim Cook on June 30, apparently asking for a special deal.

According to Apple, “armed with the apparent view that Epic is too successful to play by the same rules as everyone else — and notwithstanding a public proclamation that Epic would ‘not accept special revenue sharing or payment terms just for ourselves,'” Sweeney asked for a side letter that would exempt Epic from the rules against enabling direct payments to a developer from app users. Apple said it rejected Epic’s request for a special deal, after which Epic resorted to its legal campaign.

But this point was easily fact-checked. Sweeney said in a tweet that in his email he specifically asked Apple to make the same conditions Epic was seeking available to all developers. In other words, Sweeney asked for a special deal for Epic and asked that all developers be given the same deal — consistent with his previous public claims.

Interesting numbers

In 2019, Epic Games reported $4.2 billion in revenue and $730 million in earnings before interest, taxes, depreciation, and amortization (EBITDA, a key measure of profitability), based on GamesBeat’s reporting. Apple reported $146.4 billion in iPhone sales and $20.5 billion in iPad sales, for a total of $166.9 billion, or 91% of Apple’s iOS-related revenue.

In January, Apple reported it had paid out $155 billion to developers since the launch of the App Store in 2008, with a quarter of that $155 billion, or $38.8 billion, paid in 2019. Assuming a 30/70 revenue split between Apple and the developers, this would imply revenues for Apple of $16.6 billion in 2019, or 4 times Epic’s revenue.

Apple argued that 84% of the 1.7 million apps on the App Store are free and Apple doesn’t collect any commissions from those apps except a nominal $99 annual fee. Apple has been taking a 30% cut from other apps since it introduced the App Store in 2009. But in 2016, Apple lowered its commission from 30% to 15% on subscriptions that renew after the first year.

Epic said its Epic Games Store has 160 million users, 200 developers, and 300 games. Over the past eight years, Epic has created 25 updates for Unreal Engine 4.

How big is Fortnite?

Fortnite had 116 million registered iOS users — 63% of whom play only on iOS. Epic has seen its daily active users for iOS fall 60% since being cut off. All told, registered Fortnite users are above 350 million, and those users have played for 2.86 billion hours.

Travis Scott’s recent concert in Fortnite drew 27 million users, and 2 million of those were on iOS. Epic views this social side of Fortnite as leverage in creating the Metaverse and outdoing other social networks.

Epic Games told the court that of the new players who created an account on mobile between April 21 (when Fortnite became available on the Google Play store) and August 12 (the last full day before Fortnite was removed from Apple’s App Store), more than 61% created their accounts on iOS.

The legislative wild card

All this legal wrangling is happening amid other controversies involving the tech giants. Apple has had to delay its move to retire its Identifier for Advertisers (IDFA) after opponents argued it would disrupt the mobile ecosystem in the name of improving privacy without replacing it with an alternative. And Congress hauled the CEOs of Apple, Google, Facebook, and Amazon before a committee to question them about possible anticompetitive practices. If Congress or government agencies find that these companies violated antitrust laws, the results could prompt federal cases and Congress could make the current antitrust laws more stringent.

Whatever happens with Apple and Epic following these opening arguments, the dispute could take years to adjudicate in the courts.