Epic Games v. Apple: Who Won and What the Verdict Entails for the Future

California Judge Yvonne Gonzalez Rogers handed down her decision on the Epic v. Apple lawsuit on Friday, September 10, after months of deliberation from the arguments in May. The final verdict was relatively simple: Epic was ordered to pay damages for violating its contract with Apple, and Apple was forced to remove its anti-steering rules from the App Store.

Apple stated after the verdict that "Today the Court has affirmed what we've known all along: the App Store is not in violation of antitrust law. As the court recognized 'success is not illegal.'"

Epic CEO Tim Sweeney tweeted about the decision:

Tim Sweeney appears more disappointed by the verdict than Apple, even though Apple lost on a long-standing business policy. Apple's anti-steering policy essentially banned app developers from alerting consumers of alternatives to Apple's in-app purchase system. It is still early to say the financial impact on Apple from this outcome until we know more about what practices are precisely allowed to steer customers to the developer's payment mechanism rather than Apple's.

Tim Sweeney comes off peeved because, even though Apple lost an important decision, Epic still stands to lose even more. The judge upheld Epic's contract with Apple as valid and reiterated that Epic knowingly broke its contract. A portion of Apple's developer contract is unlawful going forward, but Epic still has to pay for breaking the agreement by reimbursing Apple for lost profits when Epic had direct payments in-app. Epic argued that Apple's developer contract violated numerous antitrust acts, while the judge concluded that Apple only had a single offense against the California Unfair Competition law – and that a single violation by Apple did not justify Epic's decision to break the contract.

"In short," said Rogers, "Epic Games cannot simply exclaim 'monopoly' to rewrite agreements giving itself unilateral benefit. Its other identified bases: damage to its reputation and the Fortnite gaming community cannot constitute irreparable harm where such harm flows from Epic Games' own actions and its strategic decision to breach its agreements with Apple."

The decision by Judge Rogers called for a payment of $6 million from Epic to Apple for lost damages – Epic made around $12 million from Epic Direct Payment on iOS (Epic's alternative to Apple Pay). On September 13, the company paid damages equal to the App Store fee of 30% plus 30% of the revenue from November 1, 2020, through the date of the judgment on September 10, 2021.

Epic generated over $5 billion in revenue in 2020, $6 million is a drop in the bucket for both companies. The real challenge for Epic going forward is that it may be locked out of the App Store entirely in the future. Judge Rogers ruled that Fortnite would only return to the App Store if Apple wanted it to return. Apple certainly can benefit from allowing Fortnite back onto iOS, but if executives feel vindictive, don't expect it any time soon. Epic has already shown its hand. They plan to appeal and continue to pressure Apple to lower its 30% app fee.

So Epic already lost nine of ten counts to Apple, with the one count not helping Epic due to the loss of its developer license. Beyond the monetary losses from Fortnite not appearing on iOS, Epic is worried about further retaliation from Apple. Apple briefly sought to go as far as to remove Unreal Engine, Epic's most popular service that developers use to design video games. After the verdict in September, the court terminated Epic's preliminary injunction from October 2020, along with Epic's developer account with Apple.

The judge was not very supportive of Apple potentially blocking Unreal Engine in a retaliatory strike in October but reaffirmed Apple's ability to decide the contents of its App Store.

"If Epic lost access to Apple's developer tools, that wouldn't break any current apps using Unreal in the App Store (or on other platforms). The problem is more for developers going forward; if Epic can't use Apple's tools, they can't release bug fixes or new features. This most likely would mean Unreal-based games would break eventually in future versions of iOS and macOS, and Epic would be unable to do anything about it." -- Riley Testut, a popular game emulation developer

As a privately held company, we lack data on the revenue or profits generated from Unreal Engine games on iOS for Epic Games. Unreal Engine is probably the most widely used game development tool globally, although the engine is primarily used for console and PC gaming. Ultimately, if Apple blocks Unreal Engine on iOS and macOS, you would expect some game developers to also abandon Unreal Engine in favor of a game engine that can be ported over to iOS instead of making a game with no future on the App Store. Developing a game across two different engines for different platforms is most likely cost-prohibitive, a point Microsoft raised in the trial as well:

"Developing a game using different game engines for different platforms may be prohibitively expensive and difficult. In any event, it is not as cost-effective as using a game engine that supports different platforms... [Apple terminating Epic's account would force it to] choose between abandoning its customers and potential customers on the iOS and macOS platforms or choosing a different game engine when preparing to develop new games.

Even uncertainty about the Unreal Engine's ability to continue supporting iOS and macOS will make it less likely for Microsoft (and, I believe, other game creators) to select Unreal Engine for their projects. When game creators are planning development projects, which can last for years, it is important to have confidence that the chosen engine will continue to be available on and support all platforms on which the game creators plan to distribute their games." – Kevin Gammill, Microsoft's general manager for gaming developer experiences

The potential blockage of Unreal Engine on Apple products is assuredly the worst outcome for Epic in all of this mess. Fortnite is a more lucrative cash cow for Epic overall, with about $3 billion in revenue last year compared to Unreal Engine revenue of around $100 million. Still, Fortnite will not last forever, while Unreal Engine is expected to continue being the premier game development engine going into the future.

Epic is in a lot of trouble at this point. Apple has the legal power to block Epic from using developer tools and blocking Fortnite and Unreal Engine from its ecosystem. Epic was hoping to reduce App Store fees from 30%, side-loading of apps, or allowance of additional application stores on iOS. They won on one point with the anti-steering ruling, but they can't take advantage of the new rule without iOS access, and now Apple is threatening the future of Epic's entire business model.

Outlook for Apple

Apple prevailed on nine of ten charges leveled by Epic, but the one charge they lost could potentially hurt App Store profits from now on. Apple can be considered the winner of the verdict for simply avoiding the much more costly monopolization charges. Apple doesn't have to change its policy on 30% app fees or allow alternative markets, which were both outcomes Epic was hoping to achieve. Judge Rogers appeared skeptical of the 30% Apple fee and found no basis for the rate in her ruling, but still felt Apple was deserving of some payment. Apple escaped most potential monopoly charges for now.

The ruling was not entirely clear, but we know that Apple has to allow developers to direct users to payment options other than those ran by Apple. This is a huge win for every developer not named Epic and one of the most significant changes to App Store policies ever made.

"Apple Inc. and its officers, agents, servants, employees, and any person in active concert or participation with them ("Apple"), are hereby permanently restrained and enjoined from prohibiting developers from (i) including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and (ii) communicating with customers through points of contact obtained voluntarily from customers through account registration within the app."

The court will retain jurisdiction over the enforcement and amendment of the injunction. If any part of this Order is violated by any party named herein or any other person, plaintiff may, by motion with notice to the attorneys for defendant, apply for sanctions or other relief that may be appropriate."

It's a bit vague, but we know that Apple is not the interpreter of the language of the ruling but instead the court itself. It appears that developers will be allowed to include external links, buttons, and calls to action to direct consumers to other purchasing mechanisms. That seems like a huge win for developers. They essentially cannot include their own in-app payment mechanism, but they can link to one from in-app. It will be interesting to see where this policy evolves before the December 9 start date for the injunction. We do not have enough guidance on how much power developers will have to steer customers to other payment processors. However, some developers have already stated their plans to test Apple on the new ruling.

If the anti-steering rule is as strong as HeyHey believes, this new rule, only valid in the U.S., could significantly impact the $6.3 billion the company rakes in per year from the country. Bloomberg notes in its piece that Loup Venture's Gene Muster put the range between $1-4 billion annual loss depending on the number of developers take advantage of the new policy.

Apple regularly posts profits annually above $100 billion, so don't expect much impact on Apple's stock. They are more than healthy enough to be hurt by even a $4 billion loss, although I doubt that the effect will be that severe. The new payment mechanism makes a world of difference for some companies that require a subscription, like Spotify, which only requires leaving the app once to sign-up and pay. However, 70% of App Store revenue is generated by games primarily via in-app microtransactions. It's unclear if customers will repeatedly choose to leave the app for a potentially inferior payment system.

Judge Rogers asked a representative for Epic if there was no anti-steering provision, would Epic still have a problem with Apple's system? "The customer could choose whether they wanted to stay and make the purchase on the app or do it some other way, right?" David Evans, an economist for Epic, admitted that nixing the anti-steering provisions "wouldn't eliminate the market power that Apple has here, but it would certainly diminish it." Evans said it would be more helpful for some apps than others — "it's pretty good for subscription-based companies that have a separate website, for instance, and less useful for mobile-only games that rely on a stream of microtransactions". But he acknowledged he hadn't conducted a specific study of the topic, so he wasn't sure exactly how big the issue would still be.

What comes next

Judge Rogers' ruling takes effect on December 9, 2021, but again not for Epic. Epic announced on September 22 that Apple denied its request to reactivate Epic's developer account. Apple's statement concluded that Apple would not consider any further requests for reinstatement until the court's judgment becomes non-appealable, which Sweeney tweeted could take as long as five years.

Apple seems to have a significant upper hand going into round two. While anything can happen on Epic's upcoming appeal, Judge Rogers did not just rule against most of the charges but found the arguments very uncompelling. She was regularly voicing in her opinion dissatisfaction over some of the arguments. Epic may continue fighting, but it could almost be time for a settlement after such a heavy loss for the company. Fortnite's lack of availability on iOS has estimated losses of around $26 million a month. That is not great, but not the end of the world for Epic, with annual revenues above $2 billion. Epic needs to settle to avoid even more costly retaliation from Apple, including the potential blocking of Unreal Engine on iOS and macOS.

Epic and Tim Sweeney have taken the loss pretty hard, but they delivered a potentially massive win for other developers with the anti-steering policy. A settlement that would allow Epic to take advantage of its win in court and remain in good graces with Apple going forward may be the wise play for now.