Epic Games vs. Apple: What’s Next for the App Economy?

If ever you needed a reminder that Fortnite is part of something much bigger than an online post-apocalyptic video game, these past few months have proven that. A court trial in San Francisco involving Epic Games, the company that owns Fortnite, and technology giant Apple, kicked off the first week of May 2021 and wrapped up the last week of May. It spotlighted a business battle with enough developer drama to pique the interest of competitive gamers everywhere.

The main argument: Does Apple have an illegal monopoly over app distribution?

Many people are split on this question of Apple’s complete dominance in the marketplace. “It’s hard to say,” suggested Herbert Hovenkamp, a professor of legal studies and business ethics at the Wharton School and a University of Pennsylvania professor of law. Hovenkamp joined host Dan Loney on Wharton Business Daily on SiriusXM Ch. 132 radio this week. “If you look at all of the platforms on which Epic Games is played, and that includes both Apple and Android and both of the major game consoles and traditional desktops and laptops, Apple has a market share of about 10%. On the other hand, if the judge can figure out a way to identify the market as a single brand that is just Apple, then of course Apple would have 100% of the market. The case law tilts in Apple’s favor on that question. It doesn’t completely rule out the possibility of a single-brand market, but it makes it pretty hard… To define a market, you have to look at platforms, sources and outlets where a product is sold. For example, if we were talking about toothpaste, we wouldn’t look at it as toothpaste sold on Amazon. We’d look at all the stores and outlets big and small where toothpaste is sold. And that’s the law that Apple is lining itself behind.”

The business backdrop for the Epic Games vs. Apple case looks something like this:

Through the eyes of Epic: You might remember about a year ago when Epic tried to sell virtual currency on Fortnite without going through the Apple Store’s payment system. This was a violation of Apple’s rules, and Apple booted Fortnite off its app store, thus setting into motion the legal battle when Epic sued Apple and Google. (Maybe you saw Epic’s Nineteen Eighty-Fortnite video.) Others had complained, but Epic was the first to take direct legal action against Apple. Epic feels that since iOS users can only access apps through the Apple Store, Apple has too much control over app distribution. Apple also charges a 30% commission fee to developers (in other words, they take a 30% cut of purchases), which Epic feels is unfair, especially given Apple’s dominance in the mobile app market.

Through the eyes of Apple: Apple says it isn’t a monopoly because it shares the phone market with Google’s Android. Also, Fortnite players are free to play the game on other platforms, like gaming consoles and computers, so the market in question is really games distribution, not more broadly app distribution. Apple also argues that it created the Apple App Store and should be able to make the rules, which app developers must abide by.

Who’s right? We don’t have an answer just yet, even though the trial has ended. U.S. District Judge Yvonne Gonzalez Rogers will take a few weeks, if not months, to decide.

We turned to Wharton Business Daily on SiriusXM Ch. 132 this week to discover some potential outcomes from this important anti-trust law battle (click the link for a definition from Wharton’s Joseph Harrington). Here’s what we learned:

Apple’s 30% Cut: In large part, this commission structure prompted Epic to do an end-run so it didn’t have to pay Apple’s fees, which ultimately sparked the lawsuit. Signs indicate that Apple is already making some changes here. “It’s pretty clear that game makers are paying more than a lot of other participants in the Apple platform are paying, so they are bearing the brunt of Apple’s costly technology,” noted Hovenkamp. Still, he added, Apple is starting selectively to reduce its commissions on App store sales. “Today, there’s an increasing number of those sales that are closer to 15%, rather than 30%,” he said.

An Epic win? The marketplace will likely see some changes if the judge rules in favor of Epic and allows other companies to distribute apps. On one hand, app prices may go down. But consumers may feel a price pinch in other ways. “Take the hard case scenario where Epic wins and where Apple is forced to throw open the app store to competition,” said Hovenkamp. “I think the impact of that will be that Apple will get less revenue from app aftermarkets. That means that the price of the phone will probably go up. One of the things that is pretty well known in this industry is that Apple sells the durable piece of the product, the phone, at a relatively low price and then it gets its revenue stream from subsequent activity. In this case, that activity has two different sources. One is royalties from the App store and the other is a rather large payment that Apple gets every year from Google for making Google Search the default search engine, which is also being attacked. If Apple loses both of these sources of revenue, then it is going to have to make it up in some other way. We may see that show up in higher iPhone prices.”

Playing both sides. Throughout the trial, Judge Gonzalez Rogers has shown interest in the arguments from both business sides, prompting observers to conclude that it’s really hard to tell how she’s going to rule. “Toward the beginning of the trial, I got the sense talking to antitrust experts that Apple had a really strong case,” said Sarah Needleman, a Wall Street Journal columnist who has followed the trial closely and who joined Loney on the radio show post-trial to talk about the potential outcome. “But now that we’re at the end, I’ve seen some signs that maybe Epic has a fighting chance here…the judge showed a willingness to accept Epic’s claims and at the same time an unwillingness to turn Apple’s business upside down. It really is at the middle point. There is no clear sign that it will go one way or the other, and the experts are divided.”

Whatever the ruling — which could be mixed if the judge allows Apple to maintain its current position as an app distributor, but requires changes to its developer guidelines — the pressure is on, say experts. Apple has been able to run its app store by its rules for more than 10 years. Companies like Epic and even lawmakers are trying to change that narrative with the help of anti-trust laws. If Epic loses, who will be the next challenger in line?

Conversation Starters

What is a monopoly? What are anti-trust laws? How do these relate to the Epic Games vs. Apple lawsuit? Inspire a broader discussion on the topic by reading more business case examples in the Related Links tab.

How do you think U.S. District Judge Yvonne Gonzalez Rogers will rule? What's your argument for that ruling? Do you think Apple is a monopolist?

If you're a regular gamer, how does this lawsuit pique your curiosity about the business behind the virtual world? What other questions do you have about how your platform and the companies that own them operate?

6 thoughts on “Epic Games vs. Apple: What’s Next for the App Economy?

  1. Seeing and learning about both sides and what the potential results of the case may lead to is very interesting. This makes you think more about revenue streams and what the primary monetary motivators are in a company. For example, with Apple most individuals would think about physical product sales first instead of digital. Furthermore, the article mentioning how prices of other Apple products might rise as a result of this is smart. A large corporation such as Apple won’t easily lose a revenue stream such as this without adjustments to other revenue streams as well. At the end of the day, they have investors to impress.

    This very educational and thoughtful article that would be excellent to discuss in class as students can relate to a case such as this easier than other topics. The conversation starters are great initial critical thinking points to get students thinking!

  2. I thought this article was extremely interesting and brought to my attention a debate I didn’t know was occurring. It was surprising to see such a fierce discussion over business ethics with a video game that I, to this point, only knew as one my younger brother was obsessed with (Epic Games). I’m also an Apple user, my iPhone laying beside me while I’m typing on my MacBook. Both companies, Apple and Epic Games are very intertwined in my, and likely many others’ lives, and therefore as citizens we all have a moral obligation to know what companies are doing and how they affect us.

    I agree with Hovenkamp that the question of whether Apple has an illegal monopoly is very difficult to decide. After thorough research, while I disagree that Apple is an illegal monopoly, I agree with Epic Games that Apple is partaking in unfair business practices. Controlling 25% of the global smartphone market (around 50% market share in the US), means over a billion people install apps from the App Store. A 30% tax on developers hurts small companies and makes it very difficult to be competitive against Apple (can’t be competitive if 30% of your earnings are given to them). Apple also abruptly removed ProtonVPN, a company that allowed people in authoritarian governments to search restricted sites, because they used “anti-censorship” language. Digital freedom is one of the most important freedoms of the 21st century and must be protected.

    But it’s illogical to call Apple a monopoly. Apple does not produce necessary goods and does not force consumers to buy goods only from Apple. Competitors do exist against Apple. Apple owns a large market share because of its reliability, maintenance, security, etc, and its existence is an advantage for consumers.

    I expected to write this comment and come to a conclusion, or at least a centrist-take, on the legal status of Apple. I can now understand why so many experts are divided over the topic. I’ve offered my input and opinions on the arguments for both sides, and I’m interested to see how this debate plays out, and how it affects the free market in regards to the regulation of a software platform.

  3. Although I was never a Fortnite player, it is undeniable that Epic Games played a crucial component in shaping many teenagers’ video game experiences. Yet, Epic’s lawsuit against Apple demonstrated not only potential traces of falsified business legitimacy but also alluded to the concept of being an independent upstander, which this article touched on by illustrating Epic’s side of the court case.

    We have seen similar accusations in the past, with Microsoft’s lawsuit against the Federal Trade Commission’s claim of the company violating the Sherman Antitrust Act in the 1990s as an example. Ironically, Apple was the company that indirectly helped Microsoft by establishing a mutual investment deal, which I believe is a part of Microsoft’s tactic to prove themselves innocent by showing that they are willing to help smaller companies needing financial support. Hence, given Hovenkamp’s statement that Apple had decreased its commissions on App store sales by a sizeable amount during a brief period, I believe that Apple is taking the same steps trying to convince critics that they are not a ‘bully’ or monopolist.

  4. While I was looking for interesting articles to write about, this article caught my eye since the outcome of the lawsuit can have an effect on my personal life, specifically gaming.

    After reading the article, I asked myself a few questions. Can Apple decrease their commissions? Yes. Would the right choice be to decrease their commissions or to offer other options? Yes. Does Apple have to change their commissions? No. Should Apple let Fortnite back in the app store? Yes(I am just slightly biased).

    Based on the facts alone presented in the article, Apple is not in the wrong since they weren’t breaking any laws such as having a monopoly in their products and services. However, I don’t see this as a black or white issue, but as a gray issue. The question presented is more of whether or not Apple’s actions are ethical or not.

    Apple is a $2 trillion company and Epic Games is a $30 billion company so a $2 trillion company taking 30% of profits from a much smaller company seems pretty greedy. 10% of Epic Games’s market share is from Apple so when Apple requires 30% commissions, it technically owns 3% of Epic Games’s total revenue. Overall, it doesn’t seem fair that Apple is receiving around 3% of the total revenue by just providing a platform, and they weren’t showing much flexibility towards changing their commissions rates.

    I believe that decreasing the commissions would be a smart economic decision for Apple since it is better for them to have some source of revenue, even if it is lower than before, than to not have any revenue, which is their current situation because Fortnite is off the app store.

    Additionally, the problem is that Apple doesn’t provide any other ways for consumers to download games except through the app store which means that Apple is forcing companies to pay a 30% commission in order for iPhone users to play a company’s game. If Apple provided other ways to download games not through the app store, like android phones, then Apple’s actions wouldn’t be considered unethical because companies would have an option to not pay a commission.

    In the end, consumers, Apple, and Epic Games will all suffer from this lawsuit. Consumers will not be able to play Fortnite on Apple mobile devices, Apple and Epic Games will both lose a source of their revenue. Hopefully, this lawsuit can benefit more than just Epic Games if Apple allows more flexibility in their commission rates because it can help smaller companies have a more sustainable source of revenue.

    Thank you KWHS for this insightful article.

  5. The article says that “if the judge can figure out a way to identify the market as a single brand that is just Apple, then of course Apple would have 100% of the market.” I have an idea that might prove this is the case. Apple produces their own brand of mobile phones, the I-phone. The only way to download apps (legally) on the I-phone is through the App store, which Apple controls. Through this, you could say that Apple does in fact have a monopoly on app distribution, but only on an Apple device.

    If this approach works, Apple may be forced to allow other methods of obtaining apps, as will other companies that employ similar methods. That’s not to say that the App store will cease to exist, but they’ll have to allow other methods of obtaining apps. This also may lead to phones becoming even more like computers, being able to download Apps straight from websites.

  6. Recently, our generation has developed a new multi-billion entertainment industry: video games. Video games, an escape to a fantasy from a stressful day, are a common pastime for most teens, including me, in this technologically advanced era. For instance, when I wanted to hang out with friends during quarantine last year, we would occasionally turn to video games as a safe way to have fun. It’s interesting to see that a videogame that I used to play, “Fortnite,” is in a huge lawsuit with Apple. It is important to note that behind this fictitious world, there is a whole business model and a marketing strategy that each company has to provide profits. Given that it is innate human nature to be greedy and to want maximum profits, disagreement as shown by the Epic Games v. Apple trial was inevitable. I fully see the perspective of both sides. Epic Games wants more profits from their game, and they aren’t content with Apple being a “monopoly” and taking a revenue cut of 30%. Apple, on the other hand, has to maintain its rule of 30% so other apps don’t try and start making demands, and this also helps Apple gain a lot of profit.

    Being intrigued by this 30%, I dug up some earnings reports & their 10k, and I found that Epic Games have made a whopping $44.3 million from its mobile app “Fortnite” in 2020 alone. With this number, we can calculate that Apple takes $13.2 million from Epic for merely placing their app on the App store. Obviously, any company would want to remove this huge cut and get the whole 44.3 million dollars that the company earned. So Epic developed Epic direct payment,” which makes users pay directly to Epic games, skipping the middleman, Apple. This disagreement ultimately led to a lawsuit. When further researching this topic, I found it fascinating that other large tech companies also helped out Epic Games during the lawsuit. Initially, Facebook stated in December 2020 that it would fully support Epic Games in the lawsuit. Soon, other tech titans such as Spotify, the Match Group, and Microsoft all declared support for Epic Games. For all these companies from different industries to come together to support one cause shows how Apple’s system isn’t perfect. As a result of the court case, it also revealed that Facebook and Microsoft are also negotiating the percentage that Apple would take. I believe that this depicts that cases like these are not unique and won’t be the last appearing on the headlines of articles.

    Through further research, I found that four months after the lawsuit started, Apple stated that they would be “lowering the revenue cut Apple takes for app developers making $1M or less from 30% to 15%”. I believe that this can be directly attributed to Epic Games v. Apple. Seeing as some progress is already happening, the whole lawsuit isn’t pointless. The downside of this lawsuit for Epic is the potential loss in revenue and customers that won’t be able to play the game. However, I believe that Epic Games, by continuing the lawsuit, is trying to send a more personal message fighting for a more open internet at the expense of some profit. I really believe that with more cases like these, we will get a more defined path between what is a monopoly and what isn’t in these relatively new industries that do not have the most distinct boundaries. I will definitely be tracking the final verdict of this court case thanks to this amazingly written and informative article.

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