Epic v. Apple Part 1: Intro
Epic Games’ founder Tim Sweeney found himself in court this week appearing in his companies’ case against Apple regarding the latter’s policy of a 30% revenue cut of all in-app purchases and, subsequently, the inability for developers and publishers to load their product onto Apple’s mobile operating system, iOS, through other means than the Apple App Store. Epic Games is the developer of arguably the most successful game engine of all-time, deemed Unreal Engine, and the hugely successful sandbox game Fortnite that helped popularize the battle royal genre now common in the game industry today. In August of 2020, Tim Sweeney’s company decided to add a “feature” that raised in-game prices only on Apple products and displayed the price you could purchase directly from their own store, essentially comparing the fees collected by Apple to a tax on access. In response, Apple pulled the game and Epic’s developer license and, well, now they’re in court.
This is not the first time Tim Sweeney or Epic have played a bit of hardball with the services that offer their games. Previously, they demanded Sony open their system allowing Fortnite to be played between individuals that own different consoles or on PC (deemed cross-play). Sony eventually complied by following suit of their competitor Microsoft’s Xbox but only after getting something no other store services received, a payment based on the sales from Fortnite purchases that do not occur on Sony’s system. The revenue sharing model between Sony and Epic was instead based on the dominance of Sony’s PS4 on Fortnite revenue at the time and thus Sony trying to account for what they saw as “lost” profit if a console with less Fortnite users had more Fortnite in-game sales.
Something Epic did not demand from Sony is exactly what Epic is demanding from Apple. The 70/30 revenue sharing model is common in the game and app industry. Sony, Microsoft, Google, Valve, and Nintendo all have the exact same split in favor of the developer. So why is Epic suing Apple? Between March 2018 and July 2020 Apple accounted for approximately 7% of Fortnite’s revenue whereas Sony accounted for 46.8% of revenue. In fact, Epic had less return from iOS than from PS4, Xbox One, Nintendo Switch, or PCs. So again, why Apple? Would it not make more sense for Epic to go after the dominant platform representing the greater sum of their revenue?
There is a potential argument of a little synergy going on in the form of Sony purchasing a $450 million dollar stake in Epic over two separate deals in the past three years. Based on Epic’s valuation at the time of the deal we could be looking at somewhere in the range of 10% ownership of the developer by Sony. This is certainly not a negligible amount and could absolutely deter a company from suing an investor. However, this still would not explain their current target in the 70/30 revenue split trial of Apple versus Microsoft or Nintendo which both represent higher revenue generated than Apple for the developer.
The most likely argument is three-fold. One, that Apple is the dominant app platform in town and represents the greatest chance to set a precedent that could hold up in court for future platforms. Two, even if the case is not currently going anywhere, Epic is suing Google. This means Epic may specifically see issues with the mobile industries revenue sharing model even if it is the same percent as console gaming. Third, it simply makes sense that Epic felt they could afford to risk 7% of their revenue in a battle with Apple versus 47% of their revenue with Sony. If a precedent can take hold, it will be easier for Epic or another developer to potentially win a case against other closed system platforms; not inevitable, as all platforms are different, but significantly easier.
Who will win Epic vs Apple? Who should win Epic vs Apple?
Like I said, anti-trust experts find the area to be difficult to predict so I will avoid this question from a legal perspective. Instead let’s examine who should win from a resources perspective. Rather, does Apple deserve a 30% cut? Should it be lower? Is Apple really wielding undue monopolistic advantages to prevent competition? Would the resources from a new revenue sharing model, that indicated less revenue to Apple and more to developers be used in a more beneficial way for our economy?
First it is important to define what a monopoly is and is not. A monopoly is: a company that holds dominant power in an industry, usually though means such as creating a high barrier of entry, becoming the one seller in the industry, responsible for price-setting, and being able to operate at a high scale such as a volume discount on products. A monopoly is not: illegal. In the United States monopolies have never been illegal. However, since the enaction of the Sherman Anti-Trust Act in 1890, due to Standard Oil Company owning 100% of all the oil refineries in the country, monopolies are regulated to make sure they do not grant themselves further advantages at the behest of other businesses. Anti-trust action in the past has ranged from the break-up of large companies into several smaller ones (AT&T/Bell System broke up in 1982 to become several “Baby Bells”) to simply requiring a change in operation (Microsoft was required to loosen their anti-competitive rules regarding competing browsers in 1998).
Is Apple’s App Store a monopoly? Undoubtedly. They are the only entry market on iOS for any developer, they set the terms of entrance for the market, and they can set their price on revenue sharing without concern for any competing marketplace on iOS (because they do not allow one). There is an argument to be made that Apple has another competitor in the mobile OS space in Google’s Android but this becomes a bit irrelevant when you factor in the cost to enter either’s ecosystem. A phone is a $1000 investment into one environment and you can not easily switch to another, a point that has been made in the recent trial regarding the misperception of competition in the marketplace between the Apple App Store and Google Play Store.
The question to ask is are Apple's advantages being used unfairly to stifle competition? Apple chooses the same revenue share model as other digital marketplaces but if there is a dividing line in the suits Epic has brought so far it is the focus on mobile rather than gaming consoles. Microsoft argued in the Epic v Apple trial that their profits from their store (which also faces no competition from another digital market) are necessary because they sell their hardware at a loss. This is an appealing argument but muddies the water even more, because Apple rightly makes a similar argument that they need to reinvest their App Store profits into research and development to maintain iPhone sales. How far from a profit source can a reinvestment into a company go until it is not deemed okay for large profits from one sector to be transferred into? Can Apple reinvest all their App Store profits into their innovative M1 chips?
The proposed challenge that Apple’s App Store wields too much power over the developers and publishers on iOS does not seem compatible with dictating the revenue sharing model Apple needs to use. How is a court going to decide what the optimal revenue share is for Apple and the rest of the industry? Is it 20% to Apple? 15%? As a legacy platform gets older you do expect its costs to decrease so maybe you fade the App Store’s take over time?
The real answer to the proposed challenge is to let the market decide. In this case, that means you have to open up iOS to either allow side-loading of apps or allow new marketplaces to arrive on iOS. It takes a while, but with added competition we would expect to see lower revenue share models introduced and potentially able to set a new revenue sharing standard. In our current model, we have no way to experiment with different revenue shares and find the optimal price. We have recently seen this effect as Microsoft lowered their revenue share with developers to 12.5% from 30% on Windows, and I would suspect other digital marketplaces such as Steam will follow suit.
Next: Benefits of added competition and can monopolies be good for society economically?
