By: Robert Auritt and Ilana Faibish
It would be an error to view Apple’s current fight with Epic Games as a mere dust-up about commission rates or antitrust issues, though it is also surely both of those things. This is a fight about who will be able to control, and of course profit from, new virtual spaces where an increasing amount of online activity is taking place as we move deeper into the 21st century. In addition to offering gaming activity of various kinds (simulating war, upgrading your house, and building stuff, for example) game titles like Fortnite, Animal Crossing, and Minecraft are increasingly using their virtual shared geographies as places for users to meet, socialize, watch movies, attend concerts, attend professional conferences and of course, make additional “in-world” purchases.
One of the great promises of the early days of the open internet was that anyone could publish anything, anyone could build a website and have a voice. With the advent of the iPhone and the “appification” of the internet, Apple (and Google) became the main gatekeepers of online content, building the virtual highway through which most of the mobile internet flows, and charging a hefty toll to those who seek to profit from their app store infrastructure. Now, companies like Epic Games and Mojang Studios are building entirely new worlds that can be accessed through their mobile apps (among other access points). From a certain point of view, these worlds can be seen as another layer of the internet in that all the various kinds of commercial activities that take place in the real world, or online, can take place in these collective virtual spaces. The builders of these worlds increasingly want to be able to profit from the commercial activity taking place in them without paying the toll to Apple.
On August 13, 2020, in what clearly seems to have been a premeditated maneuver, while updating its hit game Fortnite, Epic Games attempted to circumvent Apple’s 30% commission rule for in-app payments. Within hours, as Epic surely knew would happen, Apple removed Fortnite from the App Store for violating the guidelines provided in Apple’s “Developer Program License Agreement” (“PLA”). Almost immediately Epic filed a federal lawsuit against Apple, accusing the company of violating antitrust laws by forcing developers to implement Apple’s payment systems. In the complaint, Epic described Apple’s removal of Fortnite as yet another example of Apple flexing its monopoly power over the market for in-app payments on Apple devices. At almost the exact same time, Epic released Nineteen Eighty-Fortnite, a commercial that savagely mocks Apple by spoofing the very same imagery used by Apple in its groundbreaking 1984 commercial for the Macintosh.
In retaliation, Apple threatened to revoke Epic’s access to developer tools and iOS support for the Unreal Engine, a game engine developed by Epic Games that provides a suite of creation tools for game development and other real-time applications. Epic describes Apple’s retaliation as overreaching and unnecessarily punitive, and Judge Yvonne Gonzalez Rogers of the United States District Court of the Northern District of California agreed. Judge Rogers stated that the ban on Unreal Engine “looks retaliatory,” but let the App Store ban on Fortnite stand. While it makes sense for Apple to impose a reasonable commission for purchases made for and within applications in the App Store, the breadth of Apple’s attempted retaliation certainly raises some serious antitrust concerns. In a world where most developers and consumers are reliant on the App Store, developers feel they are being strong-armed into forfeiting a seemingly excessive and non-negotiable 30% commission to Apple, and are often left with no choice other than to inflate game prices and in-app fees to offset the difference
Apple urged the court to deny Epic’s motion, arguing that when developers find ways to avoid its digital checkout, as Epic did, “it is the same as if a customer leaves an Apple retail store without paying for a shoplifted product: Apple does not get paid.” Tim Cook, the chief executive of Apple, argues that Apple is actually doing developers a favor. Cook suggested to Congress last month that when software was still sold in brick-and-mortar stores, 50% to 70% of the retail price went to intermediaries. For perspective, PayPal, Square, and other electronic payment companies manage to charge merchants a more modest 3% fee, as do credit card companies like MasterCard and Visa. When tech giants such as Apple and Google, which are together worth more than $3 trillion, also make the software that backs virtually all of the world’s smartphones, and those smartphones provide businesses access to reach millions of people, those businesses are left to ask: “does Apple really need one-third of my sales?” The question is, is Apple abusing its dominance?
Epic is not alone in this battle, and nor is the fight limited to control of new virtual spaces. Recently, Facebook planned to launch a new tool in its app that lets online influencers and other businesses host paid online events as a way to recoup revenue lost during COVID-19. In an effort to maximize proceeds for small businesses, Facebook asked Apple to reduce the 30% fee that would normally be owed from in-app purchases. Apple declined. Facebook then attempted to add a disclaimer at the point of sale in an effort to inform consumers that 30% of proceeds would not actually benefit small businesses but would rather be diverted to Apple. Apple removed the disclaimer.
In another instance, WordPress let it be known that Apple had cut off its developers from making updates to the WordPress iOS app unless WordPress enabled users to buy domain names within the app. This required WordPress to integrate Apple’s payment systems for purchases, and enabled Apple to take its 30% cut for all domain names sold in-app. WordPress agreed to the change.
Similarly, Spotify complained to the EU last year that it was anticompetitive of Apple to impose the 30% fee on Spotify since Apple’s own competing Apple Music service is of course not forced to reduce its profits by 30% just to gain access to the app store.
Indeed, the Epic Games suit is not even the only antitrust action currently pending against Apple. In 2019, the Supreme Court allowed another antitrust lawsuit against Apple to proceed. That case concerns a group of iPhone users who accused Apple of driving up the price of apps by charging third-party app developers a 30% commission. However, the case is likely to end in a settlement before the district court has an opportunity to rule on whether Apple violated antitrust laws.
As for this preliminary battle between Epic and Apple for control of increasingly vital virtual spaces, we will have to wait and see. Judge Rogers seemed uncertain as to which party would prevail on the merits, noting that “this is not something that is a slam dunk for Apple or for Epic Games.” Whoever wins is likely to come out well-positioned for the future as digital life increasingly migrates into virtual worlds.