Replay: Epic Games and Apple to face off in second hearing. Here’s what to know

Epic CEO Tim Sweeney had long believed this 30% fee to be exorbitant and that mobile users should have options outside a single platform. So his company offered iPhone and Android players v-bucks directly from Epic at a discounted price, circumventing Apple, Google and the 30%. — Photo by Joshua Hoehne on Unsplash

On Oct 21 in a California courtroom, Cary’s Epic Games will resume its two-year showdown with the world’s richest tech company. That would be Apple, which Epic accuses of maintaining an illegal monopoly. Apple thinks otherwise.

The case could impact how apps are downloaded — and how much they cost — for both iPhone and non-iPhone users.

“Epic vs Apple is what I’ve previously called the Superbowl of antitrust,” said Florian Ederer, an associate professor of economics at the Yale School of Management.

Last year, following a 21-day trial, US District Court Judge Yvonne Gonzalez Rogers issued a split ruling that left neither side satisfied. Both Apple and Epic appealed this decision to the US Court of Appeals, which will hear the case on Oct 21.

In the lead-up to the next Epic-Apple faceoff, get acquainted (or reacquainted) with what sparked this legal feud, and what’s at stake for app developers and customers:

Why are Epic and Apple suing each other?

On Aug 13, 2020, Epic introduced an alternative way for iPhone and Android users to purchase “v-bucks,” the in-game currency of its popular game Fortnite. Previously, mobile players on these devices had to buy v-bucks through Apple’s and Google’s payment systems, both of which take 30% of the revenue major app developers generate.

Epic CEO Tim Sweeney had long believed this 30% fee to be exorbitant and that mobile users should have options outside a single platform. So his company offered iPhone and Android players v-bucks directly from Epic at a discounted price, circumventing Apple, Google and the 30%.

This option didn’t last long. Apple and Google booted Fortnite from their app stores that same day, stating Epic had violated their developer agreement policies.

Apple said permitting users to access outside apps could jeopardise the safety of Apple’s iOS systems. In a statement, Apple explained how Epic had taken “the unfortunate step of violating the App Store guidelines that are applied equally to every developer and designed to keep the store safe for our users.”

Sweeney was prepared for his next move. Epic immediately sued Apple and Google, launching a #FreeFortnite campaign with a video parodying Apple’s famed “1984” commercial.

“Epic Games has defied the App Store monopoly,” read text at the end of the video. “In retaliation, Apple is blocking Fortnite from a billion devices. Join the fight to stop 2020 from becoming 1984.”

Apple filed a countersuit against Epic.

Who won the first hearing?

It was a split decision favouring Apple.

Gonzalez Rogers did rule that Apple was violating California’s Unfair Competition Law by banning app developers from mentioning or linking to alternative payment options outside the App Store. But most of Epic’s claims hinged on Apple being deemed a monopoly for not allowing iPhone users to download apps outside the App Store or make in-app purchases outside Apple’s payment system.

When it comes to adjudicating if a company controls too much of a given market, the scope of the market must first be defined. Epic argued the relevant market in this case was Apple’s iOS in-app payment and distribution systems, of which Apple obviously has a monopoly. In contrast, Apple argued the relevant market was the broad category of digital gaming, which has a tremendous number of competitors.

Gonzalez Rogers landed in the middle, saying the market was mobile gaming transactions and that Apple controlled most of this market but not enough to be considered a monopolist.

“While the Court finds that Apple enjoys considerable market share of over 55% and extraordinarily high profit margins, these factors alone do not show antitrust conduct,” Gonzalez Rogers said. “Success is not illegal.”

Epic paid Apple US$6mil (RM28mil) for violating its app developer agreement. Apple still levies a 30% revenue fee on major app developers.

Following the verdict, Sweeney voiced his dismay on Twitter, writing “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.”

Fortnite remains unavailable on iPhones.

In January, the United States Department of Justice filed an amicus brief asserting that Gonzalez Rogers erred in how she applied federal antitrust law to determine Apple wasn’t acting as a monopoly.

Why is neither company backing down?

It’s about money, of course, though Sweeney has displayed an iconoclastic streak that further explains why it’s his company taking on this antitrust fight.

For Epic, the 30% mobile fees are particularly burdensome because Fortnite itself is free. The game makes money by selling players v-bucks that allow them to upgrade their weapons, outfits and even dance moves. Fortnite is one of the most popular video games of all time, with several million people playing it at any given time. Ederer says this has given Epic “a lot more leverage” to take on a behemoth like Apple.

And though Epic is a relative minnow compared to Apple, which has a market share of more than US$2.2 trillion (RM10.4 trillion), the Triangle-based game developer has the deep resources to fund a protracted legal battle.

Epic is currently valued at more than US$31bil (RM146bil) , and Sweeney is ranked as the wealthiest person in North Carolina with a net worth above US$7bil (RM33bil).

And why is Apple not backing down? The App Store is hugely profitable, and its 30% fees are a big reason why.

“It’s just a massive cash cow,” Ederer said. “(Apple’s) profits aren’t coming as much from the sales of the phones themselves but from the app purchases users are making and the 30% commissions.”

In 2021, iPhone users spent more than US$85bil (RM400bil) on App Store purchases and subscriptions.

Apple contends the 30% fee helps ensure the security and functions of its App Store. And in November 2020, a few months after Epic sued, Apple dropped its fees to 15% for app developers who earn less than US$1mil (RM4.7mil).

Could this next ruling could be different?

Appellate courts typically uphold lower court decisions, but some legal experts say the Epic-Apple case is too singular to use precedent as a predictor.

“They’re very new and interesting questions here,” said Eleanor Fox, an antitrust scholar at New York University who has previously done some consulting work for Epic. One of the questions Fox mentioned is the scope of the relevant market, which the Court of Appeals could define differently.

If the Court of Appeals defines the market more narrowly, it could expose Apple to a monopoly charge. But just being a monopoly isn’t, by itself, unlawful. A court must then find the monopoly is acting to exclude competitors without a business justification for doing so.

Rebecca Allensworth, an antitrust professor at Vanderbilt Law School, ballparked Epic’s chances of achieving a reversal at almost 50%.

“I would almost never give such high odds for a reversal,” she said. “The facts that the District Court found are not particularly bad for Epic, so there’s a lot Epic can work with. The judge found a lot of facts about Apple’s conduct that are really bad: That they don’t face competition, that they charge really high prices and have really high profits.”

A complete reversal in Epic’s favour could lead to lower-priced phone apps, Allensworth said, as developers might lower prices if they could keep more of the revenue.

Unlike the initial trial, which lasted three weeks and featured a parade of experts and cross-examinations, next week’s appellate hearing will be short — maybe lasting only an hour or two.

The speakers include the Department of Justice, the State of California, Epic and Apple.

Depending on the outcome, legal experts expect one or both of the companies to appeal once more to the United States Supreme Court. But the highest court in the country is under no obligation to take up the case.

Several thousand cases go through appellate courts each year, but the Supreme Court only typically hears 100 to 150 of them. – The News & Observer/Tribune News Service

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