Apple Versus Epic: The Verdict
Battle of the Industries
Earlier this year, we did a writeup on the ongoing litigation between Epic Games and Apple. The gist of the situation thus far is that Epic Games has accused Apple of becoming a “behemoth seeking to control markets, block competition, and stifle innovation.” Epic alleges Apple of running a monopoly on the iOS app market while charging exorbitant fees and taking a 30% cut of all transactions. Epic is seeking to loosen Apple’s iron grip on the app ecosystem, potentially allowing third-party payment options and marketplaces to sell apps outside of the Apple controlled App Store. The resulting lawsuit between these two industry giants could have profound impacts on the future of how apps and digital transactions occur in online marketplaces.
The trial kicked off back in early May, with hearings lasting about two and a half weeks. It took the better part of four months for California District Judge Yvonne Gonzalez Rogers to deliver her ruling. In that time, there was a great deal of speculation surrounding who would win and the implications of what that verdict would mean. In the end, neither Apple nor Epic really won out over the other. Instead, the true winners of this showdown turned out to be the developers and consumers.
There is a lot to unpack from the results of this trial, so join us as we break down the most important aspects of the ruling and what they mean for companies and consumers alike.
Apple Won – Or Did They?
Epic’s suit against Apple encompassed ten different charges ranging from Unlawful Monopoly Maintenance to Unreasonable Restraint of Trade. Ultimately, Judge Gonzalez Rogers ruled in favor of Apple by dismissing nine of ten charges brought against them, concluding that Apple was not unfairly monopolizing the mobile app market through its iOS and App Store marketplace. As a result, Epic was ordered to pay the 30% share of their $12+ million in revenue previously withheld from Apple throughout this debacle. The total compensation Epic is required to pay amounts to over $3.6 million in damages.
Judge Gonzalez Rogers also ruled that Apple was not unfairly monopolizing the mobile app market by strictly prohibiting third-party marketplaces within the iOS environment. This was Epic’s lynchpin argument, and if Apple lost it would have been absolutely disastrous and their worst-case scenario. However, the judge did rule against Apple in the final charge related to anti-steering provisions, stating “Apple’s anti-steering provisions hide critical information from consumers and illegally stifle consumer choice.”
She issued an injunction that would, 90 days from the ruling, permanently block Apple from preventing developers from including links in their apps to other payment options. This opens up an avenue for developers to skirt the App Store’s payment system altogether, effectively eliminating Apple’s 30% cut. That’s a huge win for developers and a massive blow to Apple, whose global App Store revenues are trending to potentially reach $100 billion by the end of 2021. Unfortunately, there is some concern over the wording used by the courts in the verdict, specifically the usage of ‘button’ versus ‘external link’, so there’s bound to be more friction and litigation in the future as these terms become explicitly defined.
The Root of the Problem
Judge Gonzalez Rogers had some very interesting insight into the arguments being made by both companies throughout this case. During the trial, both sides argued which market the iOS version of Fornite belonged to. Epic was claiming that Apple held a monopoly over the iOS app ecosystem; while Apple insisted Fortnite was competing in the overall video game market (not just on iOS) and therefore couldn’t possibly be subject to a monopoly. The Judge says both are wrong.
According to Gonzalez Rogers, the root of the issue is not which market the game belongs to, it’s whether or not Apple has an unlawful monopoly on “digital mobile gaming transactions.” She drew distinctions between the separate user bases of mobile, PC, and console games, making sure to point out the “freemium” pricing model heavily relied upon in mobile gaming apps. Overall, despite the court being generally sympathetic to Epic, nearly all of their charges were dismissed.
Apple is on the Precipice of the Mobile Gaming Technology
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Apple Store Woes
Despite dismissing Epic’s charges, the judge did have some pointed remarks regarding the App Store. She noted that “nothing other than legal action seems to motivate Apple to reconsider pricing and reduce rates.” She also points out that Apple “does a poor job of mediating disputes between a developer and its customer,” and that it has been “slow either to adopt automated tools that could improve speed and accuracy or to hire more reviewers” in regards to their app review process. “Apple’s slow innovation stems in part from its low investment in the App Store,” Gonzalez Rogers concludes.
At one point, despite rejecting Epic’s economic analysis of the situation, Gonzalez Rogers does accept that “Apple’s operating margins tied to the App Store are extraordinarily high;” and she specifically points to the lack of competition as the driving force at play. “The point is not that…Apple provides bad services. It does not,” she says. “The point is that a third-party app store could put pressure on Apple to innovate by providing features that Apple has neglected.”
Apple’s Walled Garden
Throughout the trial, Apple brought in several witnesses to promote iOS as an extremely safe and secure ecosystem, due almost exclusively to Apple’s ‘Walled Garden’ approach. They claimed no other system would be sufficient for protecting the sensitive data on user’s phones. Epic fired back by saying that was merely a pretext for blocking out any competition.
Judge Gonzalez Rogers was particularly dubious of Apple’s Software Engineering VP Craig Federighi, who gave a dramatic yet suspicious testimony on iOS security systems, claiming he was “stretching the truth for the sake of the argument.” Generally speaking, she was quite receptive to Epic’s suggestion that Apple could still review and approve apps for iOS while allowing them to be distributed through other sources. “Even though unrestricted app distribution likely decreases security, alternative models are readily achievable to attain the same ends even if not currently employed,” she concludes.
This is not to say she completely sides with Epic. Judge Gonzalez Rogers does agree that a comprehensive human review offers a “safe and trusted user experience” that is actually pro-consumer. By contrast, she says Epic’s proposed solutions “principally appear to eliminate app review.” In essence, this particular ruling crushed Epic’s dreams of third-party marketplaces and side-loaded apps on iOS.
Developers Have the Right to Share Alternatives
While Gonzalez Rogers concluded that Apple was not unfairly monopolizing mobile gaming, she was quick to remind them that they had violated California’s Unfair Competition Law (UCL), particularly the section on anti-steering provisions. The Judged focused on a specific section of
Apple’s developer agreement: “Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase.”
She did not hold back in her criticism of Apple’s policy, stating “by employing anti-steering provisions, consumers do not know what developers may be offering on their websites, including lower prices.” Developers are allowed to advertise to their users via email, but only through email addresses they collected outside of the iOS ecosystem, which customers may not even know exists.
On top of that, users likely don’t even know what cut Apple is taking from each transaction, and that there might be different or better options available outside the App Store. As an example, Judge Gonzalez Rogers discusses a simple newspaper subscription. “…If they subscribe to their favorite newspaper on the web, all the proceeds go to the newspaper, rather than the reduced amount by subscribing on the iOS device.” While some users might appreciate that Apple offers a unified place to manage all of their subscriptions, many users might not, and “Apple actively denies them the choice” of discovering possible alternatives.
“Apple created a new and innovative platform which was also a black box. It enforced silence to control information and actively impede users from obtaining the knowledge to obtain digital goods on other platforms,” Gonzalez Rogers continues . “Apple has used this lack of knowledge to exploit its position.”
Epic Can’t Cut Apple Out Entirely
However, Judge Gonzalez Rogers was also quick to point out that if Epic had their way, they would be cutting Apple out of the picture entirely, despite making use of -and benefitting from -Apple’s IP (the App Store). She called this “deficient,” stating that unbundling Apple’s baked-in payment system from the App Store is not that simple. She claims that if developers are using the App Store to generate income, Apple deserves a cut. So even if the developers found some loophole to eliminate Apple from the deal, “Apple could still charge a commission on developers. It would simply be more difficult for Apple to collect that commission.”
Put simply, Apple is no longer allowed to stop developers from telling users about cheaper prices available elsewhere. But if that developer ends up routing substantial money away from Apple, Gonzalez Rogers has now left the door open for Apple to collect their “Apple Tax” in other ways.
Epic Willingly (and Knowingly) Broke a Valid Contract
Despite this ruling declaring aspects of Apple’s developer agreement unlawful, Epic has still been ordered to pay for breaking their contract. In contrast, Apple hasn’t been ordered to pay a cent nor have they been directed to reinstate Fortnite or other Epic Games apps on iOS. Why is that?
Essentially, Apple screwed up, but not bad enough to warrant Epic breaking the contract in the way they did. A single violation of California’s UCL was not severe enough to justify the scale of Epic’s rule breaking. On top of that, Epic made a second violation in the process. They added their alternative payment system to Fortnite via a remote hotfix update, despite Apple’s policy clearly stating it could not “provide, unlock, or enable additional features or functionality through distribution mechanisms other than the App Store.” Judge Gonzalez Rogers contends Epic “never showed why it had to breach its agreements.”
What Does All This Mean?
The results of this case will almost certainly have far reaching impacts in the coming years. Industry experts and analysts are still pouring over every detail of the case trying to determine the ramifications for users, developers, and companies alike. Aron Solomon, head of strategy at Esquire Digital, weighed in on the verdict during an interview with GamesBeat:
“Most experts realize that Apple won the battles but Epic won the war. This seems lost on a lot of people in the media as well as on Epic itself. The most important part of this case is that developers don’t have to transact commerce on the App Store — they can now steer customers to their own sites. Epic wanted to be able to collect money directly on the App Store. Again, insiders knew this was absolutely not going to happen. But the win is massive. Now Epic and any other developer don’t need to fork over 30% to Apple. They can collect payment on their own sites and pay 3% to Stripe for so doing.”
Clearly, this is a huge win for developers. And if the developers are not getting gouged 30% on every transaction, there is the possibility that some App Store offerings may decrease in price as developers pass on the savings to their consumers. So, by extension, consumers won a big victory with this verdict as well.
One final thing of interest worth noting is how Judge Gonzalez Rogers was clearly unimpressed by not only the arguments made by the prosecutors, but also the way in which Apple conducts themselves as a business. She hinted throughout the trial that had Epic focused on other arguments and brought in other key pieces of evidence, there was a substantially higher chance that she would have ruled in their favor. This knowledge could easily pave the way for future litigation against Apple that might produce dramatically different results.
“There are a lot of comments from the judge about how she is uncomfortable with the way Apple does business,” says Richard Hoeg, a Michigan based attorney who specializes in video games, software-as-a-service, and intellectual property issues. “You could look at this ruling as a roadmap for how Epic or the next person who sues Apple could win.”
At Lithios we value outside opinions. This blog was written by one of our guest bloggers, Jonathan Baker, with feedback from the Lithios team.