The trial isn’t over yet, so we’ll be periodically updating this piece.
This year, we get to witness one of the biggest legal battles between two tech giants: Apple and Epic Games.
In one corner is Apple, creators of the iMac, iPhone, and the App Store among many, MANY other innovations in techdom. In the other corner is Epic Games, a longtime video game developer who happens to create and own one of the most important video game engines in the industry: The Unreal Engine. Also, they made the smash-hit game Fortnite.
How did this legal battle start? And how will it end? Well, we’re here to break it down for you in this handy dandy guide.
How It Started
Last year, Epic Games intentionally broke Apple’s rules by putting its own payment processing system in the iPhone version of Fortnite, bypassing Apple’s 30% fee and giving players a V-Bucks discount. Apple responded by kicking Fortnite off the iOS App Store, while Epic launched a lawsuit and PR campaign declaring the iPhone maker “anti-competitive”. Both companies have built their cases for close to a year now, leading up to the eventual courtroom battle.
Software developers who want to release iPhone apps must do so through the iOS App Store, where Apple takes a cut of each sale. iOS apps also have to use Apple’s payment processing for in-app purchases of digital items (like Fortnite V-Bucks), and Apple takes a cut of that, too.
Epic says that iOS is an unavoidable operating system for mobile devs—most people either have an iPhone or an Android phone—and so it’s not fair that Apple forces everyone to play by its “oppressive” rules. At least according to Epic the plaintiff, Apple’s rules for third-party iOS apps are both unfair, anti-competitive, and illegal.
If we’re being frank, one of the chief reasons why Epic wants this is for more money. Epic wants to sell V-Bucks in Fortnite without paying for Apple’s 30% fee. But also, it sees itself as more than a game and engine developer, wanting to build a “metaverse” where players and creators can buy and sell content and play games across platforms. Making companies like Apple getting rid of rules and fees on smartphones would be a great kickstart to that plan.
The trial started on 3rd May and will take “maybe 17 days” according to US District Judge Yvonne Gonzalez Rogers. Do not expect a speedy resolution to this battle. Unlike other civil court business cases, this one will be held in person in Oakland. You can gather more details on the Northern California US District Court website.
Epic first has to prove that there’s a market for Apple to have monopoly power over beyond just issues about Apple’s terms of service and software feature.
Epic argues that there’s a “foremarket” for smartphone operating systems, iOS and Android, and an “aftermarket” for apps that run on smartphone operating systems. By selling iPhones, Apple creates “iOS app distribution” and “iOS in-app payment processing” aftermarkets.
Epic will then have to demonstrate that Apple’s behavior is anti-competitive and that Epic’s proposed remedy is legal, assuming that the court accepts Epic’s definition of the markets.
Apple says that it doesn’t control a market because it’s competing in one.
Apple sees the App Store as a “game transaction platform” which competes against other game transaction platforms, such as the Google Play store, Steam, and the PlayStation and Xbox stores. In that market, Apple doesn’t have anything close to monopoly power: It estimates it has 23.3% to 37.5% of the market share.
Some argue that the App Store 30% revenue cut is too high, but the market has settled on it. To keep up with other digital storefronts, it recently lowered its cut for developers who make under $1 million in revenue per year. This is hardly a monopoly move if you have to tweak revenue cut conditions to stay competitive.
Other counter-arguments from Apple include (but not limited to):
- Apple sells “devices,” not a mobile operating system. The App Store and in-app payment system on iPhones are part of what makes an iPhone an iPhone.
- The in-app payment system in particular is not a product. Apple doesn’t market it, and app developers don’t have to use it if they want to sell physical goods, only digital content.
- The iOS and App Store rules and security features protect consumers and developers. This has been a debate between Apple and Epic since the former’s App Store has a lot of garbage apps that get through.
- The App Store has made things better for everyone. Customers gets access to tons of apps, and developers make money. Epic itself has made over $700 million.
- People do switch away from iPhones and iOS devices, buying Android devices instead. This is clear evidence of competition on Apple’s end.
How It’s Going
There’s a lot of documents and revelations revealed during the court case.
Epic Games CEO Tim Sweeney Talks About “Metaverse”
Epic recently announced US$1 billion in funding for that vision and expressed that Apple’s App Store policies could not make that vision happen.
He faced a somewhat difficult question on day two: Couldn’t the iPhone Fortnite app send users to the Safari browser to buy V-Bucks? Apple doesn’t disallow purchases made through a web browser. Sweeney had to say, but it’s inconvenient for users. Judge Rogers didn’t seem too convinced that the inconvenience is a big deal given that Fortnite players tend to be young.
Epic Games Spent US$1 Billion On PC Exclusives By 2019
The company spent a lot to get 110 exclusively for Epic Games for at least a year. The company is doing this to gain 50 percent of the PC market, but that’s a generous prediction and that’s only if “Steam doesn’t react”. In the worst-case scenario, Epic would have its share peaking at 20 percent and then falling to about 8 percent or so.
Epic Paid A Lot Of Money To Gearbox For Borderlands 3 Exclusivity
Thanks to certain documents being made public via the Apple vs. Epic lawsuit that’s all the talk this week, we now know how much Epic paid Borderlands 3 developer Gearbox Software: a hefty sum of US$115 million.
Epic Paid A LOT Of Money For EGS Free Games
Epic had to shell out a bit to give away some of its partners’ games for free on the Epic Game Store. Some standouts include Batman Arkham ($1,500,000), Subnautica ($1,400,000), and Mutant Year Zero ($1,000,000).
The grand total is US$11,658,000. To Epic’s credit, the user acquisition cost numbers are low and Epic picked up nearly five million new users for dollars or cents per person.
Epic Apologized To Ubisoft CEO About Division 2 Piracy
Here’s the email in full:
I’m writing to apologize for the shortcomings in our Epic Games store implementation and our Uplay integration.
In the past 48 hours, the rate of fraudulent transactions on Division 2 surpassed 70% and was approaching 90%. Sophisticated hackers were creating Epic accounts, buying Ubisoft games with stolen credit cards, and then selling the linked Uplay accounts faster than we were disabling linked Uplay purchases for fraud.
Fraud rates for other Epic games store titles are under 2% and Fortnite is under 1%. So 70% fraud was an extraordinary situation.
To stop the fraud, we disabled purchasing of Ubisoft games. We will make our best efforts to restore service as quickly as we can. This depends on a real-time system for disabling refunded and fraudulent purchases on Uplay, and anti-fraud improvements in Epic’s service. This work will likely take at least 2 weeks to complete.
The fault in this situation is entirely Epic’s, and all of the minimum revenue guarantees remain in place to ensure our performance.
I’m sorry for the trouble,
Fortnite Made US$9 Billion Between 2018 and 2019
Epic Games’ battle royale shooter Fortnite made US$9,165,000,000 in two years. That huge number comes from a financial board presentation report that Epic created in January 2020. In this document, Epic stated Fortnite made just over $5.4 billion dollars in 2018. The following year, the popular battle royale game pulled in $3.7 billion. Internally, Epic has made far less with its other businesses: Epic game engine Unreal brought in US$221 million in revenue while EGS brought in US$235 million in revenue.
For comparison, Microsoft spent US$7.5 billion to buy all of Bethesda while Disney paid US$4 billion for the Star Wars license and Lucasfilm. And that’s the chief reason Epic Games seems fine going to war with Apple on this: it can afford to. In fact, even if the EGS isn’t profitable, its current money-making game is keeping the entire company and its ventures afloat.
…And Other Miscellaneous Points
- Apple’s cross-examination pointed out that EGS’ Top 20 list has 25 games.
- Apple is not happy with Epic’s Xbox witness, Xbox business development Lori Wright on testifying that game companies sell consoles at a loss to attract new customers, with game sales and online service subscriptions generating the profit.
- Apple tries to admit that Epic Games features pornographic and adult games. What they did was pull out an itch.io link that is on Epic. However, they didn’t show the EGS; it’s only distributing the app store of itch.io. This argument went on for 10 minutes.
What if Epic Wins?
This would be huge news. This would help change the mobile app business and establish a limit to the “walled grade” hardware and OS model, which then favours free software distribution. Oh, and Apple will need to put Fortnite back on its App Store.
What if Apple Wins?
It seems that Apple may have a favourable case given its counter-arguments. If they win, Apple’s status quo will remain. However, this will not be the last the company will hear from Epic, given that the latter can start multiple fires with its Fortnite riches. Companies will definitely cut down their revenue cut with developers by a considerable amount; Microsoft did so a while back with its 12% cut for developers.