The DeanBeat: Interpreting what Epic v. Apple means for games

A federal judge last week issued a landmark ruling in Epic Games antitrust lawsuit against Apple over how Apple runs the App Store and charges a 30% fee for all developers. I offered my own interpretation of the ruling, in which Apple won nine major points under federal antitrust laws and Epic won only one in California’s antitrust law in its struggle to get Fortnite back into the store and curb Apple’s power.

I’ve solicited more opinions from developers, payment companies, antitrust attorneys, and other experts. These sources have helped identify key questions in the ruling, the depth of Apple’s legal victory, and opportunities for Epic to turn the case into a larger defeat for big tech companies. The results are more complicated than we first thought, but some important details have turned up that I haven’t mentioned yet.

The 180-page order from U.S. District Court Judge Yvonne Gonzalez Rogers in Oakland, California held that Apple violated California’s laws against unfair competition when it came to a narrow but important matter of “anti-steering rules.” The judge ruled Apple can’t force developers to be silent when it comes to telling consumers inside a game that there are better digital item deals outside the App Store. Still, she ruled in favor of Apple on all other important counts in the complicated antitrust lawsuit.

While it stuck to the law, the judge’s ruling is full of observations that clearly showed that she didn’t care much for either Apple or Epic Games, said Richard Hoeg, a partner at Hoeg Law in Michigan and a frequent commentator on YouTube about legal cases involving games, in an interview with me.

The limits of antitrust

After the ruling came out, plenty of commentators were saying that it’s time to change antitrust law to deal with big tech companies. In looking at the decision, lawyers offered the reminder that antitrust law doesn’t protect competitors. It protects consumers. If there isn’t a harm to consumers, it’s hard to prove a tough competitor is guilty of monopolistic behavior.

“What we focus on in antitrust is if they engaged in some conduct that enables them to charge some price that is above what it would exist in a competitive marketplace,” Jonathan Lewis, an antitrust/competition partner at Lowenstein Sandler, said in an interview with GamesBeat.

“This is about who is controlling the relationship and the money flow,” Lewis said. “I think the question is whether Epic bit off more than it could chew. Fairly often in antitrust cases, where you have somebody challenging the way somebody does business, people sometimes swing for the fences. That doesn’t mean they’re necessarily wrong. It’s just that’s the way they think it’s best to pitch the case.”

Hoeg said antitrust cases are difficult to both prove and predict.

“Antitrust law from its very inception has been very vague and amorphous,” Hoeg said. “It was designed to be a catch-all from really 1890 onward. I don’t blame anybody for thinking either side was going to win because ultimately, a lot of antitrust law comes down to what’s in the judge’s mind. What is the relevant market? Does this go too far? Does it not? Antitrust is one of those areas that I think is ambiguous enough in its application that it really does live in the minds of the judges.”

Apple’s landslide victory?

The judge found that Epic overreached in its antitrust claims, and she held that Apple wasn’t an illegal monopoly.

“Given the trial record, the court cannot ultimately conclude that Apple is a monopolist under either federal or state antitrust laws,” the judge said.

She said Apple had earned its success, and that wasn’t illegal. Apple acknowledged in testimony that it tried to make it more attractive for consumers to stay on its platform, or making it “stickier.” But the judge said that is “not necessarily nefarious.” Its market power may flow from a good relationship with consumers who like Apple’s products.

“This was a mixed decision in which there is no clear winner or loser,” said Jennifer Rie, senior litigation analyst at Bloomberg Intelligence, in an email. “My view is that the decision is better for Apple than for Epic Games. This is because the judge ruled that Apple was not a monopolist and didn’t violate federal antitrust laws. Therefore, she did not grant the primary remedies Epic was seeking, which were fairly drastic business model changes — to require Apple to allow other app stores on iOS devices, other than Apple’s own App Store, and to allow app developers to use their own payment processors within their apps.”

Parker Miller, a partner and antitrust attorney at Alston & Bird, also said in an email that he didn’t see any winners. The court didn’t declare Apple a monopolist, but the one part of the case that it lost could lead to a loss of revenue and a loss of control over the monetization of apps. And he noted that the court might find Apple could be proven a monopolist, given different evidence than was presented by Epic.

Today’s ruling isn’t a win for developers or for consumers. Epic is fighting for fair competition among in-app payment methods and app stores for a billion consumers. https://t.co/cGTBxThnsP

— Tim Sweeney (@TimSweeneyEpic) September 10, 2021

Tim Sweeney, the CEO of Epic Games, tweeted that Epic did not win. And Apple is certainly celebrating.

“We are very pleased with the Court’s ruling and we consider this a huge win for Apple. This decision validates that Apple’s ‘success is not illegal,’ as the judge said. As the Court found ‘both Apple and third-party developers like Epic Games have symbiotically benefited from the ever-increasing innovation and growth in the iOS ecosystem,’” said Kate Adams, the general counsel of Apple, in a statement. “The Court has confirmed, after reviewing evidence from a 16-day trial, that Apple is not a monopolist in any relevant market and that its agreements with app developers are legal under the antitrust laws. Let me repeat that: The Court found that Apple is not a monopolist under “either federal or state antitrust laws.”

The relevant market

This was a narrow legal victory in some respects, as the judge noted that if Apple had a 65% market share, it would have been declared a monopoly on its face. It only has 55% of mobile game purchase revenues, the judge decided.

Significantly, the judge decided the “relevant market” for antitrust evaluation was the mobile game in-app purchase market. Epic wanted the App Store itself to be declared the relevant market, in which case Apple would have automatically been declared a monopoly because there was so little choice in either Android or other platforms if you really wanted to reach Apple’s one billion lucrative users.

Apple attorneys had wanted the judge to consider the wider PC and console game sectors to be part of the relevant market so that it could show that there was plenty of choice for both developers and consumers if they didn’t like Apple’s rules. The judge did consider the Nintendo Switch and the upcoming Steam Deck to be possible competitors in mobility devices, but she rejected Apple’s argument about the wider market, saying that mobile gamers were unique and behaved in different ways than the wider market of players.

Gonzalez Rogers also found that, without evidence of excessive and illegal monopoly power, many of the allegations didn’t stick. She found that Apple’s reasons for disallowing sideloading of apps to be plausible and not “pretextual,” meaning Apple’s rules were not just a pretext for stopping developers like Epic from sidestepping Apple’s own pricing, payment systems, and commission.

Epic argued that Apple had poor security and should have let developers tell players they could go off the App Store to get cheaper digital items elsewhere. Apple said it prohibited this for security reasons. Epic asked why Apple allowed sideloading and alternative payments on the Mac.

The judge noted that Epic cannot just commandeer the App Store, which Apple invested heavily in during the early days of the iPhone, as a kind of public commons or a public utility (dubbed an essential facility in antitrust law, like a bridge that everyone must use to get across a river). That would be like the U.S. government taking away Elon Musk’s SpaceX rockets and giving them to NASA, some observers said.

“What does it say to innovators, if we’re going to say now that you’ve been successful, you have to change. It’s not like they came up with this 30% fee commission from thin air,” Lewis said. “It’s the standard. Are we going to punish innovators for their success and require them to turn over access to what they’ve created because people don’t like to pay what they’re asking?”

Companies should expect to gain rewards from their intellectual property investments, the judge said.

“I believe that the most significant parts of the decision were No. 1, that the judge rejected the definition of the market set forth by Epic, which tried to prove that the market included only iOS devices; and No. 2, the judge accepted Apple’s procompetitive business justifications for maintaining a closed system [a walled garden], such as privacy, safety, and security,” Rie said. “Epic tried to show that these were a sham, but the judge disagreed. This may provide a solid defense for Apple in future matters.”

The judge’s subversive messages

Here’s where the judge went a bit rogue. Apple’s Craig Federighi said the security on the Mac was not good enough, and that the App Store was more secure because of the prohibitions. But the judge found this “late admission” — why didn’t Apple say Mac security wasn’t good enough before the trial? — to lack credibility.

“There are a lot of comments from the judge about how she is uncomfortable with the way Apple does business,” Hoeg said. “You could look at this ruling as a roadmap for how Epic or the next person who sues Apple could win.”

Still, the judge found that Apple’s security argument was a valid reason for keeping developers inside its walled garden, and not just a pretext to block competition.

In another subversion of Apple, she suggested there were possibly less draconian security methods that Apple could use that would sit better with developers, such as an “enterprise model” or “notarization model” of security where developers who were trusted could be allowed more freedom. The judge hinted that this was a common ground where developers and Apple could negotiate some kind of settlement.

And the judge adopted Apple’s view that Epic overreached, that its PR campaign was premeditated, and its surreptitious “hotfix,” where it triggered the confrontation by secretly modifying Fortnite to enable off-App-Store transactions, was underhanded.

She ruled that Epic broke its contract, the Apple Developer Program License Agreement (DPLA) that every developer must sign, with Apple. Had Epic not done these things, Gonzalez Rogers might have looked more sympathetically on the fact that Epic did not seek damages and it was trying to make life better for all developers by getting rid of the Apple App Store tax.

Gonzalez Rogers took a swipe at Apple, suggesting it should not rest easy, as it stood “near the precipice of substantial market power, or monopoly power, with its substantial market share.” The judge did not need to point this out; she did so as a warning to Apple to back off.

Yet the judge noted that Apple offered no evidence that its 30% commission of all App Store in-app gaming purchases — which amounts to $14.7 billion take of total mobile game spending of $47.6 billion in 2020, according to measurement firm Sensor Tower — was justified on the basis of costs.

“As described, the commission rate driving the excessive margins has not been justified,” Gonzalez Rogers said. “Cross-reference to a historic gamble made over a decade ago is insufficient. Nor can Apple hide behind its self-created web of interlocking rules, regulations, and generic intellectual property claims; or the lack of transparency among various businesses to feign innocence.”

But she noted her hands were tied on ordering Apple to cut those commissions, given the current evidence and given that she did not find Apple to be an illegal monopoly. She said the U.S. Supreme Court has recognized that judges are not well suited to micromanage businesses.

“Clearly the judge doesn’t love 30%. But there’s some percentage that’s allowed,” Hoeg said. “The judge says that in about 10 different places in her judgment that Apple is owed some money for this. I’m not sure 30% is the right number, but you’re owed something.”

She said that App Store profit margins of 75% were extraordinary but again noted that success was not evidence of an abuse of monopoly power. And she noted that Apple never raised prices — it even cut its 30% rate in a couple of instances, reducing it to 15% with subscriptions in their second year; and this year Apple cut the rate to 15% for app makers who make less than $1 million a year.

That means Epic had to show egregious anti-competitive behavior and back it up with a lot of evidence. Part of the problem was self-inflicted, Hoeg said. Epic asked for an expedited trial, and so it had to limit its witnesses, exhibits, and trial time. But in many places, the judge asked for either more evidence or wondered why Epic didn’t address certain arguments, like the public utility argument.

Lastly, the judge suggested someone might look into how much Epic relies on “impulse purchases” from consumers to generate revenues for Fortnite. That was outside the scope of the antitrust case, but the judge mentioned it anyway. At the same time, the judge virtually instructed Epic how to build a better anti-monopoly case, Hoeg said.

Epic’s small victory

Under California antitrust law, Gonzalez Rogers found that marketplace owners such as Apple can set their own marketplace terms, but she directed Apple to end its rules that prohibit game companies from communicating with players and steering them to better deals elsewhere.

Apple had put in place “anti-steering” policies that directed developers to use its payment system — which generates the 30% commission — in part because it reduced security and privacy risks for players. The judge pointed out this enables Apple to monetize its intellectual property, and she noted evidence supports the argument that consumers value these attributes of privacy and security, and trustworthiness.

Apple had argued that Nordstrom does not advertise prices inside Macy’s stores for its goods. But the judge said Apple created a “black box” where it enforced silence around competitive pricing elsewhere.

“Apple [is] hereby permanently restrained and enjoined from prohibiting developers from (i) including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and (ii) communicating with customers through points of contact, obtained voluntarily from customers through account registration within the app,” the judge said.

She found Apple had unreasonably restrained competition and harmed consumers with a lack of information and transparency about policies that affect consumers’ ability to find cheaper prices, increased customer service, and options regarding their purchases.

The anti-steering rules stop consumers from learning from developers that there may be lower prices on their websites, she said. I found at least one expert who considered Epic to be the big winner because of this small victory.

“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,” said Aron Solomon, the head of strategy at Esquire Digital, in an email to GamesBeat. “Epic wanted to be able to collect money directly on the AppStore. 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. Stripe is the big winner here.”

We’ll examine whether that view is correct or not later.

How Epic’s win could become a big victory

I think that Epic should press the point that it made about friction, and how very small inconveniences like telling users they have to use the web to buy virtual currency rather than letting them buy it with an alternative payment option directly in the App Store could produce so much friction that no one would ever do it.

It seemed like the judge’s suggestions were tantamount to telling Epic how it should file an appeal, enter more evidence, and gain a greater victory in the appeals court. But if Apple resists compliance with this small loss, the retaliation against Apple could be big. Apple faces other lawsuits, and it has tangled with the antitrust regulators in both Japan and South Korea, where restrictions will likely be tougher. It continues to face a regulatory investigation by the European Union as well.

Epic could use these allies to come to its defense, and they are likely to support Epic in its parallel antitrust lawsuit against Google, which has also been accused in a separate lawsuit of doing the same thing as Apple to Epic and Fortnite.

The PR war

If there was a miscalculation, it was Epic deciding it had to do the hotfix in a surreptitious way, where it secretly updated its Fortnite app to enable links to discounted prices off the App Store on its own website. Epic clearly broke its developer agreement.

“You can tell from her decision, the judge wasn’t particularly happy with the way that Epic originally presented its case with the breach and the marketing and everything else,” Hoeg said. “That’s always going to impact somebody. A judge is a human being.”

Epic evidently thought it was the only way it could show there was a real demand for sideloading discounted Fortnite virtual currency pricing. But here the judge made Epic pay Apple its 30% commission and other fees that added up to $6 million. At least the judge did not order Epic to pay Apple’s legal bills, which were probably a lot more.

But the judge viewed Epic’s deception as a reason for Apple to take retaliatory measures, such as kicking Fortnite out of the App Store and terminating the developer support for Epic’s Unreal game engine. This could be very dangerous for Epic’s customers, as we note below.

However, if Apple presses its legal advantage against Epic, it could lose the PR war. Epic could say it is a victim, and that antitrust laws should be changed to stop Apple from carrying out such retaliation. Epic could lobby Congress, which has bipartisan support for reining in big tech, to change the antitrust laws to stop such behavior from companies that have become extremely powerful, even if they don’t hold monopolies as defined by laws and precedents that are more than 100 years old.

Indeed, if Apple continues to flex power, act like a bully, and Epic calls it out, there could be consequences. Developers could decide to leave the platform for others such as Android. It’s no surprise that mobile gaming publisher Zynga is starting to make games for the PC.

But the judge pointed out there was a flaw in Epic’s “opportunistic” PR campaign. Epic’s Sweeney admitted on the stand that he would have taken a special sweetheart deal from Apple for Fortnite to play lower royalties if it had been offered. Epic had positioned itself as the good guy, fighting on behalf of the little developers, but the judge took note of Sweeney’s response.

Why Epic is in trouble

The judge did not order Apple to allow Fortnite back in the App Store, and she said Apple was right to terminate its developer contract with Epic because of the hotfix deception. Apple could legitimately argue it can never trust Epic.

“That kind of surreptitiousness is something that the court was never going to like,” Hoeg said. “And so Apple always has the right to say, ‘Well, look, I don’t I don’t trust you anymore.’”

Epic could cave to Apple’s demands in some kind of settlement, but that’s a lot of humble crow to eat. On top of that, the judge rescinded her temporary restraining order that stopped Apple from cutting off developer support for Epic’s Unreal Engine. That order was in effect, pending a finding that Apple had violated antitrust laws. Since the judge did not find that was the case, Apple is free to cut off the developer support.

“Apple has the contractual right to terminate its DPLA with any or all of Epic Games’ wholly owned subsidiaries, affiliates, and/or other entities under Epic Games’ control at any time and at Apple’s sole discretion,” the judge said.

Epic had pointed out this could mean that Unreal Engine would not be able to access Apple’s code updates and could quickly become incompatible. That means that the games of Epic’s Unreal Engine customers — who generate $97 million a year or more for Epic — could break. That would be a customer disaster for Epic and could compel many to switch to the Unity engine. I very much doubt that Epic considered this outcome when it decided to go forward with its lawsuit and “Project Liberty” campaign. Hoeg noted the judge clearly did not like Epic’s PR gambit at all.

Epic must not let that happen, and so its best bet is to get back into good standing with Apple through some kind of settlement.

What might happen next

The judge’s order takes effect in three months on December 9, and Apple will have a chance to appeal. How the injunction is written and the nature of the order is shaped will matter enormously.

Apple will have to permit developers to advertise better deals and lower prices if they go off the App Store to buy their digital items. But Apple does not have to enable consumers to make those purchases directly through alternative payment providers within the App Store, as she ruled the “payment systems” monopoly, as Epic alleged, did not hold up. That was a big part of the case that Epic lost. All Apple has to do is let developers tell consumers about discounts elsewhere and link to those discounts.

Even if consumers go off the store to take advantage of those discounted offers, there is nothing stopping Apple from demanding a 30% cut of those sales, though it would be tougher to collect, Hoeg said.

“The judge very specifically finds that Apple’s control of distribution, which is the store itself, and in-app payment processing, is legal,” Hoeg said. “That’s the most important part.”

Right now, Apple just collects the payment and takes its 30% take in its own store transactions. Now that could change with developers collecting the purchase fees first. Apple would have to get its money after that. Here’s a case where the friction for Apple may increase, and it may begin to feel like the shoe is on the other foot — at how painful it is to face friction when it comes to waiting for someone to pay you.

In the future, developers could collect the money directly, and Apple would have to trust them to pay it. The judge said Apple has a right to monetize its intellectual property, but she does think 30% is not justifiable and she didn’t say Apple has to be paid first.

But she didn’t explicitly stop Apple from getting its 30%. For instance, Apple could decide to rewrite its developer contract so developers would have to submit to an audit and disclose the exact revenues they generate off the App Store and share 30% of that with Apple, Hoeg said.

The judge is not likely to issue restrictive rules on Apple rules that would protect developers but that kind of order would probably overreach in terms of micromanagement and be overturned on appeal. Here, developers would have to trust Apple to implement these rules in good faith.

As for an appeals court, it would not likely dispute a lot of the facts that were entered into evidence in the case, unless it found some egregious errors. Rather, it would look at whether the judge applied the law correctly, Hoeg said.

Payment provider impact

It would have been a big win if alternative payment providers could set up in the App Store, but this is not the case, said Chris Hewish, the president of payments company Xsolla, in an email to GamesBeat. Still, there are big opportunities.

“I really see this as an opportunity for developers to start earning more money while developing closer relationships with their players and customers,” Hewish said. “We’ve already seen companies have great success running commerce for their mobile games from the web, with some games making up to 40% more revenue than they were when driving monetization solely through the app store. It’s a real opportunity for developers to get creative and leverage the data they normally wouldn’t receive to do things like customize pricing and offers.”

The opportunity is that mobile developers finally have some clearance to run webshops for their mobile commerce, without fear of running afoul of Apple, he said.

“Some companies were already doing this as part of crossplay, with mobile and web versions of their game linked on the backend,” Hewish added. “But this was an investment that very few mobile devs were willing to make. Now that fear is removed and we’re seeing counsel for multiple companies finally giving the green light to run webshops and steer their players to them. We’ve seen with our own eyes just how lucrative this can be, so we know the opportunity is large. But again, anyone looking to run a webshop needs to have solutions for digital taxes, VAT, fraud, and customer service.”

After the dust settles it will be clear that larger mobile developers and publishers won, Hewish said.

“These are companies with enough revenue and marketing savvy to create webshops where they can redirect and monetize their mobile players while providing a sense of community or exclusivity that they aren’t able to do within the app store,” he said.

Christian Owens, the CEO of managed payments firm Paddle, said in an email to GamesBeat that Epic is appealing the decision because its real objective was always to obtain a seamless in-app purchasing mechanism, as well as the external payment concession, that permits it to bypass Apple’s cut entirely.

But as noted, that bypass of the 30% cut is not a given. Apple can discourage consumers from going off the App Store because they could face security risks, possible scams, and billing disputes.

“For software companies that have existing relationships with their customers, this will create huge opportunities to tap into new revenue,” Owens said.

He predicted we would see a massive push from the payments sector as companies race to develop better, cheaper, and smarter alternatives for sellers who can finally choose how they sell their products.

Developer impact

Developers may get a benefit that was paved by Epic, but Epic is not able to enjoy that benefit itself so long as Fortnite isn’t in the App Store.

“This opens the path for developers to communicate with their users and to include a link in the app that diverts a user out of the app and App Store, perhaps to the developers’ website, to pay for the app outside the App Store at a lower price than in the App Store,” Rie said.

If Apple doesn’t seek to delay the order or is denied, the developers, as of December 9, can include a link in their apps that takes users out of the App Store and allows users to buy apps, subscriptions, or app purchases outside the App Store, Rie said. But as noted above, Apple could aggressively demand that they pay Apple its full 30% cut.

Rie believes that game developers themselves could turn up the antitrust heat on Apple by lobbying. Both the House and Senate are considering legislation that would regulate the app stores. They can push Congress to enact legislation that benefits developers, changing the law from protecting just consumers to adding protection for competition, where the developers are positioned.

“Some of what you’re seeing in antitrust reform legislation being proposed right now is the notion that we should get rid of the consumer welfare standard and move to a different standard than really analyzes things on the competitor level,” Hoeg said. “There is definitely room for reform in a law that is more than 100 years old.”

Apple’s next move

The case will likely move to appeals, as Epic has already said it will appeal the decision.

“While anything could change on appeal, our view is that the ruling is more likely to stand than not. Only Epic has noticed an intention to appeal so far,” Rie of Bloomberg Intelligence said. “Apple has not yet done so, though we think they probably will. We think Epic will have a tough time getting the ruling reversed. If Apple decides to appeal, it will likely also ask the court to stay its injunction pending the appeal. If the court says no, Apple can appeal the denial of the stay. We give 50-50 odds on Apple getting a stay, if, in fact, it goes forward with an appeal. If this happened, it would mean nothing changes for at least another year and likely longer.”

Rie expects the U.S. Supreme Court, with its new conservative majority, would likely uphold the judge’s ruling and even overturn the single victory that Epic had under state law.

In my opinion, the smartest thing that Apple can do is to get developers back on its side. It can declare victory, and then it can give developers what they want by slashing its developer fees to 15%. That will generate better profits for the game industry without doing much harm to Apple’s bottom line. Cutting $7 billion in profit from Apple each year would reduce its $57 billion profit from 2020 to just $50 billion, or a mere 12%. That’s worth it if it generates goodwill among developers. Those developers are already upset about another move Apple made, favoring privacy over targeted advertising, by curtailing the use of the Identifier for Advertisers (IDFA).

I asked Hoeg why Epic didn’t bring up IDFA as part of its case, as it showed how opaque Apple’s process is when dealing with complaints from developers. Hoeg believes that Epic didn’t bring up IDFA because Apple has a pretty good case that they’re competing with other phone makers by emphasizing privacy, and that’s the reason for the decisions that it makes. Even if these decisions impact developers, Apple is justified if its primary aim is better user privacy.

“If Epic brought that up, I see that as a problematic argument for Epic,” Hoeg said. “It does mean that you are participating in a platform held and controlled by someone else.”

Ironically, this anti-targeted advertising move might hurt Apple. Apple might not be able to demand that developers track users and purchases because of this privacy stance, and so both developers and Apple would never know if an off-store consumer purchase came as a result of coming from the App Store or the consumer came from some other developer advertisement elsewhere.

Indeed, Apple is not winning any popularity contests, and many may remember the judge’s ruling in saying that Apple engaged in bad behavior. Rather than appeal the case, Apple might want to accept this decision as the least harmful, and it may still hope that all of this will blow over and Epic will cave.

However, if I know Sweeney just a little bit, I’m pretty sure he’s not going to cave. So we may be in for years of litigation.