Epic’s battle with Apple is coming to the courts in Oakland, California on May 3. The history of the battle (aka “Project Liberty”) is well documented in the news. You may be more familiar with Epic’s popular multiplayer game Fortnite than the privately held parent company that today is worth an estimated $28 billion.
What’s at stake: Apple’s App Store model and that of other app stores is at stake — as well as for the thousands of developers who rely on the Apple iOS and other platforms for distribution.
To be clear, I am not qualified to offer a legal opinion, but I am making the case that it is worth taking into consideration the good that has come from app stores and their business models. Far more companies would be worse off in the wireless carrier model that Apple disrupted (more on that below). Yes, there are rules — and also alternative platforms that are far larger, if one doesn’t like the rules that Apple created. But Apple seems entitled to protect the brand and product it has built.
Let’s start with some history for context.
- Many of us remember when the wireless carriers controlled access to our phones. Few if any developers could afford the cost of doing business with the carriers, let alone buying a spot on the top deck. Steve Jobs had the vision to create a new model — one far more open to developers. He created a model that benefited all of us. App stores such as those from Apple, Google, and Samsung bring healthcare, education, and banking to billions worldwide — in addition to games and entertainment.
What is this lawsuit about?
- Epic is essentially accusing Apple of antitrust behaviors. Since Fortnite’s debut on iOS in 2018, Apple has paid Epic $700 million. In accordance with Apple’s business model for its App Store, it keeps 30% of revenue and pays 70% of revenue back to the developers. To keep this argument simple, that’s $300 million for Apple and $700M for Fortnite — since 2018. Tim Sweeney, Fortnite’s creator, now is worth an estimated $7.4 billion.
- In-app purchases is another aspect of this case. To retain more revenue, Epic launched its own “V-Bucks” currency in Fortnite. Apple still holds claim to 30% of this revenue if the V-Bucks are purchased on its platform. If a consumer buys the V-Bucks on another platform, Apple gets none of the revenue.
How does the App Store work?
Developers pay Apple $99 per year. Apple returns 70% of the revenue generated from app purchases. Paid apps represent about 15% of all apps on the platform. Apple reduces fees for small developers or those whose apps generate less revenue. The remaining 85% of the apps on Apple’s App Store are free to the end user. Yes, many of them may be supported by advertising. Consumers often have a choice to purchase versions of the same apps that are offered free of charge. Apps from banks, retailers, travel services, and more are free. There are categorical exceptions where Apple has different terms — for example, magazine or media subscriptions.
Back to the core question: If a company builds infrastructure or a platform to distribute services for third parties, is that company entitled to set the rules of engagement?
The answer has to be “yes” if there is fair access, terms, and competition. In Apple’s case:
- Apple has spent hundreds of millions of dollars (if not more) building out its App Store since 2008. It did so to protect consumer privacy and device security. There isn’t zero cost. Moreover, the company continues to update and improve the hardware and operating system at great expense — then comes the cost of marketing, distributing, and selling devices.
- Apple also built a marketplace that grossed $64 billion in 2020. The platform generates revenue for a lot of developers. And large entities such as Facebook, Instagram, Snap, WhatsApp, and more wouldn’t be nearly as successful without this platform. The true wealth generated by Apple is far beyond App Store revenues. Even Google makes money on the iPhone.
- No one is forced to use the App Store. “If developers choose to create native iOS apps using Apple’s intellectual property—including Software Development Kits (“SDKs”) and 150,000 Application Programming Interfaces (“APIs”), which are protected by patents, copyrights and trademarks—they must agree to the terms of Apple’s Developer Program License Agreement (“DPLA”), including distribution through the App Store.” (Source: Apple’s Proposed Findings of Fact and Conclusions Of Law. (Case No. 4:20-cv-05640-YGR).
- The App Store is one of many platforms in the market — platforms that also collect 30% commission. “The App Store competes with many other digital games transaction platforms, including those available on Android smartphones; Windows, Amazon, and Android tablets; mobile gaming devices such as the Nintendo Switch; game consoles such as Microsoft’s Xbox and Sony’s PlayStation; and PCs. And a new crop of online game streaming services promises yet more competitive pressure … Epic’s user data from March 2018 to July 2020 shows that Fortnite users exemplify the substitutability of game transactions across game transaction platforms. [Hitt TT.] During that timeframe, 35.9% of users that played Fortnite on iOS devices also played Fortnite on another device.” (Source: Apple’s Proposed Findings of Fact and Conclusions Of Law. (Case No. 4:20-cv-05640-YGR).
- Apple didn’t build its platform on shared public resources. I often think of the analogy to the wireless carriers: They build the internet infrastructure that is the foundation for education, healthcare, banking, media, communication, and more. In contrast to Apple, the wireless carriers and cable providers make direct use of public resources such as bandwidth and public infrastructure. (Just remember, I’m no legal expert.)
- Apple has a minority share of smartphones globally.
- Consumers will side with Apple. Those who purchase Apple devices do so in part because Apple protects their privacy and secures their devices. Consumers have options. They can choose with their money.
Like many other entities in the tech world, my colleagues and I will be following this case as it unfolds.