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Epic at the gates

“Epic Games and Apple are at liberty to litigate this action for the future of the digital frontier, but their dispute should not create havoc to bystanders. Thus, the public interest weighs overwhelmingly in favor of Unreal Engine and the Epic Affiliates.”

Last Friday, a federal judge ruled that Apple Inc., one of the largest companies in the world, could not retaliate against a rival (in this case Epic Games) in a way that harmed third parties. The ruling is part of an injunction against Apple and, more importantly, part of perhaps the most important legal battle of the year.

At issue is the extent to which phone operating system developers like Apple and Google can control what we see, hear, and purchase. Apple and Google hold far more power over their operating systems than Microsoft did in the 1990s, and Microsoft faced severe penalties for their monopolizing practices. But in the modern era, Apple and Google have made a novel argument: they don’t control anything, it just looks like they do.

Consider Fortnite, the popular multiplayer game at the heart of this case. Fortnite‘s developer, Epic Games, wanted to circumvent Apple’s 30% cut on in-game transactions. To do that, Epic simply installed its own in-game payment system. This violated the terms of the App Store, so Apple pulled the game.

Apple’s argument is that it can do this because the App Store – which it says is an independent entity not part of the operating system – is a retail marketplace, and it is in the best interest of the marketplace to control how things are bought and sold on it. Just as you cannot set up shop in the middle of a Walmart and sell your video games, you cannot set up shop within the App Store. Of course, iPhones can only run applications installed through the App Store for “security,” which means you’re only going to be able to run Fortnite if you jailbreak the device.

Promotional image for Fortnite from Epic Games

Apple argued that it should ban Epic Games in full, not just Fortnite. Doing so would have broken the Epic-owned Unreal Engine that many hundreds of independently-developed games run on, and Friday’s ruling bars Apple from doing so on the grounds that there’s no clear link between Epic’s Fortnite practices and the Unreal Engine, and, again, shutting down Unreal would “create havoc to bystanders.”

If, however, Apple prevails in the suit with Epic, it could block Unreal Engine later, particularly if it prevails in its argument that Epic is in some way untrustworthy. Trustworthiness – or a lack thereof – is key to Apple’s position that Epic is the rule-breaker.

Epic Games, on the other hand, thinks Apple exercises a monopoly. Almost 60% of American mobile devices run Apple’s iOS. Jailbreaking, the once-popular practice of overriding Apple’s security rules, is in decline. Without access to the App Store, Fortnite is not going to survive, and access to the App Store requires following whatever rules Apple sets.

Mobile Operating System Market Share United States Of America (source: statcounter)

Epic Games has a history of being upset about the cut taken by distributors. In 2018, the company launched the Epic Games Store, a competitor to the dominant PC game distributor Steam. Steam, like the App Store, takes a 30% cut of each sale, while Epic Games argued that a distributor could take just an 12% cut and be successful (Epic takes a 19% cut from games that use its Unreal Engine). To help overcome Steam’s dominant marketing position, Epic promoted exclusive distribution, something common in consoles but rare in desktop, earning the ire of users who were reluctant to shift their purchasing from Steam to the Epic Games Store (which is, of course, the whole point).

The App Store dispute is slightly different from the Steam dispute, though. It isn’t just about the 30% cut but about the exclusivity that Apple holds over the user (different, it should be noted, than exclusivity of distributor prized by the Epic Games Store). Users can’t see anything that Apple’s App Store doesn’t want them to see. Let’s not pretend that Epic Games is concerned about the prospect of censorship; while in theory this could be used to censor content, in practice it’s mostly used to ensure that Apple gets a revenue cut whenever possible, something other app makers have complained about frequently. Chief among these is Spotify, who filed an antitrust complaint with the European Union in 2019 over the fees. Spotify says the purpose of the fees is to artificially increase the cost of competitors to Apple’s own services, like Apple Music. The company has its own subscription system and doesn’t rely on the App Store infrastructure, but any users who subscribes to Spotify using their iOS device instead of a computer or Android device has to do so in a way that allows Apple to take a 30% cut.

Apple is muscling its way into the gaming market with Apple Arcade, a service that has so far failed to capture meaningful market share. One big criticism? Apple Arcade games aren’t that great. Perhaps that’s because the $5 per month service touts that there are no in-app purchases and all the games are ad-free, which raises the question: how are developers making money? For now, Apple is simply paying them, much like it is with its flagging Apple TV+ service where the company has reportedly dumped more than $6 billion to create a service that only around 10 million people are using. Both Apple TV+ and Apple Arcade can’t be money-losers forever, though. Either the company needs breakthroughs for both or it needs to squeeze out the competition.

Airconsole, a device agnostic game distribution platform, splits a user’s monthly subscription fee between the developers of the games the user plays. Airconsole takes a 30% cut, as do the app marketplaces.

If, like with Airconsole, Apple splits the subscription cost between users, well, Apple has an advantage over Airconsole, which has to also pay Apple a 30% cut. Both services have the same subscription price. This could eventually squeeze Airconsole out of the market, or at least out of the larger iOS market.

Likewise, although Fortnite is a free game, a competitor could emerge on Apple Arcade. Unless Epic Games agrees to Apple’s 30% cut on all in-app purchases, it could be shut out as a rival – backed by Apple – steals its thunder.

There is still a long way to go in this trial, which – along with the Spotify antitrust action in the European Union – feels like the opening salvo in a conflict between the developers who build the apps we use and the companies that maintain the devices we use them on. Since efforts to get a truly open alternative to iOS and Android have not been particularly fruitful, its no surprise that developers are taking the fight directly to the tech giants themselves. Whether that fight will mean the end of the App Store’s walled garden remains to be seen, and it could be years before we see.

Christopher Pereira View All

Political scientist and layabout, editor at Pyramid, maybe an author someday? Of like a real book? No need to rush it, though.

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