Apple’s Antitrust Battle against Epic Games Rages On, and the Stakes Are Getting Higher
The appeals case will bring additional scrutiny as the U.S. Department of Justice and the State of California will present their own arguments.
Over the past two days, Elon Musk and his cronies have gone on the offensive. The target? Apple.
The most valuable company in the world halted nearly all of its advertising on Twitter and threatened to remove the social media app from its App Store, according to Musk. (Apple has not responded to the allegations.) As a result, Musk and his friends turned unofficial Twitter executives have attacked the iOS developer for what they call the most powerful tech monopoly since late-’90s Microsoft.
One of Musk and Co.’s key criticisms is what’s colloquially known as Apple’s “app tax,” the 30-percent take that the company withholds on all transactions made in apps on iOS devices.
Musk called it a “secret,” but it’s not—that revenue share has existed since Steve Jobs launched the App Store as Apple’s CEO in July 2008. Musk may just now be feeling its effects as he focuses on building out Twitter’s Blue subscriber base—but the app tax certainly sparked the ire of many app developers long before Musk’s recent acquisition of Twitter. (Platformer reported on Tuesday that Musk is delaying Twitter’s paid verification to avoid Apple’s tax.)
And while Musk and his posse continue to spout off on the issue, the landmark antitrust case that could actually change that tax rate—Epic Games v. Apple—resumed litigation in the U.S. Court of Appeal for the Ninth Circuit on Nov. 14.
So what are the stakes in this appeal and what has happened so far? Here’s what you may have missed about Epic v. Apple.
I. Why Epic Filed Suit in the First Place
Epic Games founder and CEO Tim Sweeney is a highly opinionated executive who has always spoken out about storefront commissions. But in the wake of his studio’s significant boom in 2018 on the back of “Fortnite,” Sweeney and his team prepared to launch their own storefront, the Epic Games Store, which ultimately debuted later that year. Its take rate? Twelve percent. That’s 18 percent less than the industry standard set by the likes of Apple, Steam, PlayStation and Xbox.
But Epic’s bone to pick with Apple (and Google, to a lesser degree) started during the summer of 2020. Frustrated by both companies’ commissions on the App and Google Play stores, Epic developed a plan to antagonize both, starting with a hotfix that would circumvent Apple and Google’s payment processors for those purchasing virtual currency in “Fortnite,” violating both stores’ terms of service.
After the fix, which Sweeney and Co. correctly identified would get them kicked off the storefronts in short order, Epic filed suit against Apple and Google and launched a marketing campaign mocking the former specifically.
Over the following months, more and more companies—such as Spotify, Match, Blockchain.com and Basecamp—joined Epic’s cause, forming the Coalition for App Fairness, a collective group lobbying against Apple’s take rate. And with it, there was meaningful change, at least to a degree.
In November 2020, Apple reduced the take rate to 15 percent for developers with less than $1 million net sales on the App Store. But that wasn’t good enough — as “Fortnite” once held the App Store’s top position and was the third-highest grossing platform for “Fortnite” sales.
The U.S. District Court for the Northern District of California first heard the Epic v. Apple case in a month-long trial in May 2021. Depositions included CEOs from both companies, Sweeney and Apple CEO Tim Cook, as well as other executives from those companies and outside experts.
The trial covered a lot of ground, defining what is and isn’t a game, revealing never-before-disclosed information about both Epic and Apple revenues, and diving into Apple’s position on cloud gaming apps—where “Fortnite” continued to be offered despite its ban from the App Store.
But Epic’s arguments felt unfocused and the company didn’t clearly illustrate how Apple’s policies differ from other platforms such as PlayStation, Steam and Xbox, all of whom levy a 30-percent tax rate, too. Apple argued that it runs a storefront like everyone else and that the iPhone and iPad were just two devices among the handful that run “Fortnite” and other games.
Epic argued that Apple exerts extreme control over the mobile app space—which, while subjectively true to many, at the time iPhones accounted for just 55 percent of active cell phones in America. At the end of the arguments, it felt almost certain that Epic hadn’t done a good enough job of aligning its case with antitrust law, and that a ruling would almost certainly favor Apple.
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II. How the Court Ruled in 2021
The court ruled on 10 different counts brought by Epic, and only one went in Epic’s favor: The anti-steering charge.
In her opinion, Judge Yvonne Gonzalez Rogers ruled that Apple could not prevent app developers from alerting users about third-party payment processes outside of the app—for example, buying virtual currency in “Fortnite” on PC instead. Many developers have long charged extra if you make purchases on iOS devices, versus directly on their websites, and the court said that Apple should allow developers to communicate this to their users directly in the app.
But on the other nine counts, one part stood out: The court said that Apple’s App Store is not a monopoly and that the company did not engage in anti-competitive behavior.
“While the Court finds that Apple enjoys considerable market share of over 55 percent and extraordinarily high profit margins, these factors alone do not show antitrust conduct,” Gonzalez Rogers wrote in her opinion. “Success is not illegal.
“The final trial record did not include evidence of other critical factors, such as barriers to entry and conduct decreasing output or decreasing innovation in the relevant market. The Court does not find that it is impossible; only that Epic Games failed in its burden to demonstrate Apple is an illegal monopolist.”
Epic, despite Apple being forced to allow “Fortnite” back onto the App Store as a part of the ruling, said it would not bring it back to iOS devices until after appeal. Apple, for the most part, reveled in the verdict.
“We are very pleased with the court’s ruling and we consider this a huge win for Apple,” Apple general counsel Kate Adams told CNBC after the ruling.
But both companies would file appeals, Apple looking to overturn the anti-steering ruling and Epic looking to receive another chance at arguing its case that Apple is a monopolist.
III. Epic and Apple’s Appeals
Prior to the appeal arguments that started on Nov. 14, several companies—and this time, not just the Coalition for App Fairness—and 35 states attorneys supported Epic’s arguments. Notably both Microsoft, whose rep Epic brought to the stand in the lower court, and Roblox filed arguments with the court.
Most of those arguments said that the lower court focused too much on the standards upheld by other companies and did not differentiate enough between the mobile phone market and other devices, such as PCs and game consoles.
“Apple’s conduct has harmed and is harming mobile app developers and millions of citizens,” the 35 states, led by Utah attorney general Sean D. Reyes, wrote in their filing. “Meanwhile, Apple continues to monopolize app-distribution and in-app payment solutions for iPhones, stifle competition, and amass supracompetitive profits within the almost trillion-dollar-a-year smartphone industry. Apple must account for its conduct under a complete rule of reason analysis.”
For Microsoft and Roblox, both expressed deep concern from a personal perspective about how Apple’s policies are affecting app developers.
“The legal issues implicated by this appeal pose significant risks to competition across the economy, far beyond gaming and in-app payments,” Microsoft argued. “A broad ruling for Apple could leave little room for a limiting principle to prevent Apple from leveraging its control of iOS to foreclose competition in countless adjacent markets.
“If Apple is allowed to step between any company with online services and users of iPhones, few areas of the vast mobile economy will be safe from Apple’s interference and eventual dominance. Consumers and innovation will suffer—indeed, they already have. The district court’s reasoning failed to give sufficient weight to these immense competitive risks and, if broadly affirmed, could insulate Apple from meritorious antitrust scrutiny and embolden further harmful conduct.”
The appellate court started hearing oral arguments on Nov. 14 and it is allowing two additional arguments: Both the U.S. Department of Justice and the State of California will argue their cases, too.
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IV. What Outside Regulators are Doing
Though the DOJ’s request to argue in the Epic v. Apple case is supposedly neutral, it does feel that it will argue closer to Epic’s point of view. Specifically, the DOJ is concerned that—if upheld—the lower court’s decision could affect its own ability to go after Apple or others in similar positions when pursuing antitrust matters.
“The district court committed several legal errors that could imperil effective antitrust enforcement, especially in the digital economy,” the DOJ argued in its filing.
If the Politico report is right, the DOJ’s long-expected offensive toward Apple is imminent, and what happens in the appeals case will have significant repercussions on how that plays out.
On the state regulator front, Florida governor Ron DeSantis—notably friendly with Musk and his social circle, who have endorsed the governor for President in 2024, should he run—spoke out against Apple in a Tuesday press conference.
“[Elon’s] providing free speech,” DeSantis said, “and so if Apple responds to that by nuking them from the App Store, that would be a huge, huge mistake, and it would be a really raw exercise of monopolistic power that I think would merit a response from the United States Congress.”