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Tuesday, September 14, 2021

Epic Games vs. Apple Court Decision has Arrived!

By LUDWIG VON KOOPA - I read the whole thing, so here's what happened as I understood it, written in my...style.

In the hottest court case associated with the videogame industry filed in 2020 (sorry, Billy Mitchell), Epic Games accused Apple of being a monopolist in the two areas of iOS app distribution and iOS in-app purchasing. Epic Games had long plotted to make a spectacle of Apple's problematic behaviour in a move that got Fortnite removed from Apple's App Store (due to Epic Games breaching their Apple contract [and this breach of the Apple Developer Program License Agreement is noted by the court] by installing a hot fix to bypass Apple's in-app purchases monopoly) and resulted in 20% reduced V-Bucks prices on PC and consoles. That price reduction—and Fortnite not being on the App Store—is still in force even to this day.

The court has ruled on the case. You can read the 185-page ruling here... or you can listen to me talk (or write) about it for you. I recommend you do both, since I find the footnote references to specific testimony to be amusing and you might find it funny too. For example, the bit about Peely the Fortnite banana man dressing up in a tuxedo “to reflect the general solemnity of a federal court proceeding.” And while I considered the in-game racial equality documentary We the People to be a failed Fortnite experiment, Epic stated it was viewed by 1.5 million people and they used that as evidence of Fortnite being more than just a gaming experience. They really believe it's a virtual social space that transcends the definition of a videogame.


Actually, that's a crucial part of it. Epic Games wanted to present Apple as being a monopolist of all app distribution (not just games—since Fortnite isn't just a game, or so Epic Games is trying to lead you to believe). Apple said that the relevant market is all digital videogames (including PCs and consoles), which would give Apple a much smaller role and therefore they're not a monopoly. The court disagreed with both of them, seeing the relevant market as digital mobile gaming transactions. While Apple has the majority market share there (55%), that's not close enough to monopolist market share yet. Epic also tried to convince the court that the Epic Games Store is a general digital store, and not... a games store specifically. In the court's write-up, they saw that claim as “suspect.” Mostly because the user interface and marketing all indicate it's a games store for gamers and gaming. (To say nothing of the name.) Still, Epic wanted to present the Epic Games Store as a full-fledged potential competitor to the Apple App Store, but it was being stifled by Apple's monopolist policies creating a barrier to entry.

To help demonstrate the harms of Apple being a monopolist, Epic Games got an expert, Ned Barnes, to analyse the operating margins for the App Store. He calculated it's over 75% for fiscal years 2018 and 2019—which the court found to be an extraordinarily high amount. (One of the consequences of having a monopoly is that you can charge higher prices and earn higher margins.) The court's expert, under Epic's belief that Apple competes with all digital selling, compared Apple's profit margins to companies like eBay's 20 to 30% and Etsy's negative 3.2% to 12%... but made no comparison to any game-selling store. (It was also noted that the Epic Games Store is not profitable.) It's noted by the court that Apple's App Store lacks in features compared to similar storefronts, and it has a low level of investment from the company. Apple's restrictions were found to plausibly reduce innovation in iOS game distribution—an effect of a market under monopolist rule.

Still, Epic never demonstrated that Apple's monopolistic profit rates actually harms consumers, and they didn't get into other aspects of monopolies. (Epic not presenting real consumer-focused evidence, survey, or analysis is a reoccurring problem with their case.) The court did note the prevalence of whales (without using that terminology), stating that the highest spenders that are less than half a percent of all Apple accounts generated 53.7% of all App Store billings in the third quarter of 2017—and game apps were responsible for 76% of all app store billings in 2017. For the App Store's gaming section specifically, 6% of App Store gamers were responsible for 88% of Apple's App Store gaming billings. One-sixth of that number (or 1% of all iOS gamers) spent an average of $2,694 a year on what's primarily in-app purchases. The court's concern about the well-being of the whales is outside of the case's scope, but they do find it interesting. They also believe that the App Store as a whole is primarily a gaming store, because that's where most of the revenue comes from. With a little multiplication, you can figure out those 6% of gamers are responsible for a significant majority of Apple's App Store billings.

Apple did actually have rebuttal evidence that many iOS customers aren't locked in or closed off... and that the rest of the customers that don't switch to Android don't switch not because they are unable to, but because they're too satisfied with Apple to consider moving. Apple also considers the Nintendo Switch to be a mobile device along with tablets, but unlike the PlayStation, Xbox, or PC. Jerks. The reason for that is to make it look like Apple is less of a monopolist in mobile gaming (if you add the Switch's numbers, Apple's market share % is less). The court, fortunately, believes that the Switch, PlayStation, and Xbox are all considered game consoles, and the Switch won't be grouped with Apple's iOS platforms and Google's Android mobile devices. (The court was also disappointed that no Nintendo affiliated witness was called upon to discuss the competitive gaming landscape due to Nintendo's unique differentiated position, though Microsoft got an affiliated witness.) ...And they all charge the same 30% commission that Apple does—though the effective rates are noted to be lower, because certain console game publishers negotiate with the console manufacturers for different rates, while negotiation with Apple is impossible. Apple never provided evidence that the value of the services they provide quantifiably justifies their 30% commission—they justify a commission, but not 30%.

There is significant commentary in the case about the reliability and credibility of both sides’ experts. I think this statement is fairly representative of how the court considered the expert testimony, and it's also representative of the kind of writing I find laugh-out-loud funny:

“While Dr. Hanssen is considerably more credible and independent that Dr. Rossi, Dr. Hanssen’s survey is also severely flawed and ultimately unreliable. First, he reports that 30–43% of respondents “regularly” use a Microsoft Windows phone even though Microsoft had 0% market share in smartphones in 2018 and no longer sells phones. This data point alone calls into question the reliability of the survey overall.”

Ultimately, the court rejected both of Epic's claims that iOS app distribution and in-app processing are separate and distinct products from selling iPhones, so if there's no product, it can't be a market, which means Apple can't be a monopolist. (The court doesn't recognise the existence of a single-brand market; as in, iOS phones aren't their own market, so therefore derivatives of that non-market, like iOS app distribution, cannot be a market either. The in-app purchasing isn't a different product since it's just an integrated system into the App Store, and it does more than just processing payments.) Also important in the court's analysis, Apple didn't change its walled garden policy after becoming a market power—it was a walled garden from the start (as a competitive differentiator) and customers understood that going in. Epic Games also lost to Apple's counterclaim to damages incurred when Epic breached their contract with their hot fix. (That's a few million dollars.) Apple won't be recovering attorneys' fees, however.

The court did take issue with the anti-steering provisions in Apple's contract, which means that developers aren't allowed to communicate with customers about what developers offer elsewhere, including lower prices. Apple has used this lack of knowledge to exploit consumers. This resulted in Epic Games's one, very narrow win. That wasn't the broad remedy they wanted, but it's something—to apply for all apps, not just gaming apps. On the basis provided by California's (as opposed to federal) Unfair Competition Law that an open flow and freedom of commercial speech is pro-consumer (price advertising brings prices down more than not having price advertising), Apple must no longer prohibit app developers from communicating with their own customers or including within the apps external links or calls to action directing customers to purchasing methods outside of the App Store. This will apply nationwide.


Overall, props to U.S. District Court judge Yvonne Gonzalez Rogers for properly understanding the industry and evaluating the logic and coherency of both sides. I thought she was very fair as well. Shame on Epic for squandering their opportunity to affect change with a pretty shoddy case. Indeed, the decision even said Apple may have been saved by Epic's failure to focus on providing evidence of Apple being a monopoly power in mobile gaming. They also found it suspicious that Epic Games doesn't have any issue with similar very set-ups on the Nintendo eShop, the PlayStation Store, or the Xbox Games Store.

Epic Games has already filed an appeal. We'll see how that goes?



Ludwig used up an entire day reading the whole case... so maybe you shouldn't read the whole thing for yourself after all. There were no exhibits included in the document Ludwig read the decision from—he hasn't been able to see the whole Court Record. Therefore, this article had no pictures to go along with it. Ludwig apologises, though not profusely. You can deal with it.

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