Fortnite on iPhone XRSource: iMore

No doubt by now, most of you are aware of a huge lawsuit filed against Apple by Epic Games over Apple's App Store policies and guidelines, its 30% cut, and what Epic calls an unfair monopoly on the distribution of iOS software. The lawsuit itself is complex, and there have already been several major developments in the case. We sat down (virtually, of course) with Florian Mueller of FOSS Patents and analyst Neil Cybart to discuss the lawsuit, how Epic got the ball rolling, its basic demands, and of course, the comparison between the lawsuit against Google. We also chatted about the context of antitrust complaints like those of Spotify, and what it all means for everyday consumers.

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Mueller has been covering smartphone patent and antitrust litigation for over 10 years at FOSS Patents including heavyweight cases such as Apple v. Samsung, Oracle v. Google, and the FTC v. Qualcomm. Mueller is also uniquely positioned as the head of a new game development company, creating a mobile game for iOS and Android that will be available next month, giving him unique insight into some of the terms and conditions that come with game development. Cybart founded Above Avalon in 2014, and is a full-time Apple analyst who measures the company from "both a Wall Street and Silicon Valley perspective." Cybart has been cited by massive outlets including WIRED, Financial Times, The New York Times, and The Wall Street Journal, and consistently ranks as one of the most accurate Apple analysts in the game.

First thoughts

I asked both Mueller and Cybart about their initial reactions to Fortnite's change in payment system, its lawsuits against Apple and Google, nineteen-eighty Fortnite, and so forth. This is what they said:

Mueller: "Low-key commercial litigation is something else for sure. Rather than just file a complaint and let the judicial process unfold, Epic opted for a noisy approach with aggressive public statements, tweets, the Nineteen-Eighty-Fortnite video, and the #FreeFortnite hashtag. They're litigating this case not only in the court of law but to at least the same if not a greater extent in the court of public opinion. Presumably Epic would like antitrust authorities such as the U.S. Department of Justice to step in, and the European Commission is already investigating a Spotify complaint about Apple's App Store rules. In addition, Epic apparently wants its Fortnite user base to exert pressure on Apple." The case is getting plenty of publicity, but what I see on Twitter suggests to me that Apple gets a great deal of support from its fans. Epic may have underestimated that Apple's App Store terms aren't really a topic end-users care about. End users don't really care how their payments are split between Apple and developers.

Cybart: "There is a certain level of hypocrisy found on Epic's part. They aren't going up against Apple and the App Store to empower users or developers. Instead, Epic is focused on grabbing more power and money. Epic Games is trying to make it seem like we are in some kind of dystopian tech state reminiscent of the 1980s and 1990s. It's nonsensical. "

Digging deeper

Focusing on Mueller's litigation expertise, I asked him about Epic's case against Apple and Google:

Q: Can you summarise the lawsuits briefly, what is Epic seeking? And what are the grievances in each case?

Mueller: "In both cases, the one against Apple and the one against Google, Apple is seeking the same thing: they want courts to force the platform makers to tolerate the use of alternative in-app payment systems. Epic argues that competition among app stores and, especially, payment service providers would benefit consumers. Epic describes Apple's and Google's 30% cut as a "tax" and its amount as "supracompetitive," so what Epic really wants is for that percentage to come down, but the vehicle to achieve this that they propose is to allow apps to use the likes of Paypal."

Q: Are there any similarities or difference between Epic's cases against Apple and Google?

Mueller: "The narrative and the proposed remedy--a level playing field for alternative app stores and in-app payment systems--are the same in both cases. The most important structural difference is that Apple makes both the hardware and the software, while Google's market share in hardware is negligible. That's why Epic's complaint against Google tackles its agreements with Android device makers. Otherwise, there would be a missing link. In anticipation of Google pointing to the fact that the core of the Android codebase can be licensed on open source terms without having to sign an agreement with Google concerning app distribution and payment systems, Epic alleges that Google broke its promise of an open Android platform."

Q: What are thoughts on the broad merits of Epic's case? And how do you think Apple and Google will set about defending themselves?

Mueller: "Epic's complaints are very well-crafted, but the hurdle for establishing an antitrust violation is high as the Federal Trade Commission just experienced when an appeals court held that Qualcomm's patent licensing practices, which Tim Cook described as "illegal" in early 2019 before signing a new multi-year deal with the chipmaker, was hypercompetitive, but not anticompetitive.

The most striking weakness of Epic's complaints is that they compare Apple's and Google's 30% cut of in-app revenues to payment services like PayPal when the far more logical comparable would be other game distribution systems such as the ones operated by Sony and Microsoft, which charge 30% just like Apple and Google."

Q: What about other antitrust complaints going on? Are there any similarities or differences with Spotify or the EU?

Mueller "Spotify quickly came out with a statement that welcomed Epic's lawsuits. There are a couple of fundamental differences between Spotify's complaint, based on which the European Commission is investigating Apple's App Store practices, and Epic's U.S. lawsuits. One is that Spotify is interested in bringing down the platform makers' cut of subscription revenues. Google lowered that percentage to 15% a couple of years ago, and Apple charges 30% during the first 12 months of a particular user's subscription and goes down to 15% thereafter. Another difference is that Apple doesn't compete with Epic, while Spotify complains that it can't profitably compete with Apple Music because of the App Store commission."

What about consumers? Should regular people be concerned with this lawsuit? What could it mean for them?

Mueller "Epic wants people to be very afraid, which is why they deliberately went out of compliance with their app distribution and developer agreements after years of honoring them and after making tons of money that way. They wanted Fortnite to be removed from those app stores so end users would be impacted. But I predict Fortnite will be available again on those platforms within a matter of months if not weeks.

What matters to iOS and Android users is to get high-quality apps and to have a secure payment option. It's very convenient for a consumer to just give Apple or Google their credit card data and to be able to make payments in any app on the given platform. If Apple or Google made it impossible for app developers to make enough money with their apps, then regular people would be affected and concerned, but that's simply not the case right now."

How long could all of this take?

Mueller: "Many disputes of this kind are settled within a year or two, but Epic stated clearly in its complaints that the objective here is not a special deal with Apple or Google, but Epic wants to bring about some fundamental change. They're revolutionaries and apparently unwilling to negotiate. This means Epic will have to take the case to trial, and then the losing party will appeal such an important case to the United States Court of Appeals for the Ninth Circuit. Given how much is at stake, it could then easily go up to the Supreme Court, in which case there won't be a final decision before the middle of the decade."

The economics

Most of this legal battle will revolve around money. Specifically, how much Apple charges developers to use its App Store, how much money it makes from the service, and how important the business is to its overall revenue. I spoke to Cybart about the economics of the App Store.

What are your thoughts on Epic's argument over the 30% cut Apple takes from developers? Is this justified? And is it in line with similar markets?

Cybart: "My stance is that a 30% revenue share arrangement is fair for initial customer acquisition. It's in line with other platforms. Expanding the scaling percentage so that the revenue share declines even lower than 15% over time makes sense for all involved."

How much money does Apple actually make from the App Store? Is it really the cash cow Epic perhaps wants us to believe it is?

Cybart: "While the App Store is profitable, it ends up representing a small share of Apple's overall gross profit. Based on my estimates for gross App Store revenue (a metric Apple doesn't disclose), App Store's net profit margin is not as high as consensus assumes."

Is Apple's stance against Epic all about money? Or is there more to it than that?

Cybart: "The App Store is a mechanism for safely distributing experiences to a billion people. Some of the fundamental App Store guidelines that we see today were established by Apple management with the user experience, not money or revenue, in mind. Apple is focused on maintaining App Store viability and vitality rather than revenue."

As we suggested last week, a lot of what Epic is proposing in its lawsuit seems really only to benefit Epic Games, especially the idea of an alternative App Store, where developers would pay revenue to Epic, rather than Apple. Cybart agrees. "Epic is primarily looking out for itself," he says, "not consumers or independent developers."

The story so far

There have already been some significant developments in the cases. Notably, Epic has asked the court to give it a temporary restraining order against Apple, in order to stop Apple from terminating its developer accounts and access to developer tools. Apple is adamant that the predicament Epic finds itself in is entirely of its own making, and all that Epic needs to do is fix Fortnite so that it complies with App Store guidelines. A hearing on that motion is set for Monday, August 24. On the TRO, Mueller recently wrote:

From the perspective of a judge, it doesn't make sense that someone would purposely breach an agreement and then ask a court to enter an order within a matter of days only to prevent the other party (that met its own obligations) from triggering the contractually defined consequences of such conduct. As Apple told The Verge, they're happy to make Fortnite available again, provided that Epic honors the related agreements, which it had been doing for years and very profitably so.

Should Epic totally surprisingly get its TRO, then Fortnite will be back up on the App Store within about a week. Assuming the far more likely outcome, which is that Epic's TRO motion will be denied, it will happen, too--just a little bit later.

There's plenty at stake in this suit, and we are only a few days in to what could be a battle over several years in court. But a ruling Monday on the TRO could give us the very first sense as to what Judge Rogers thinks about the basic merits of Epic's case, and Apple's defense against it.

Make no mistake, we'll be hearing a lot about this legal case over the coming months, and regardless of which way a judge rules, there will likely be appeals and counter-appeals to deal with too. Depending on the outcome, the suit could have big repercussions on both Apple, Google, and their respective marketplaces, as well as the way in which we as consumers download and enjoy apps and software on our mobile devices.

Thoughts?

What do you think about Epic's pursuit of Apple and Google? Do you think there is a clear "right side?" Whose interests do you think are best served by these actions? Or is it all just too early to tell?

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