In March of 2008, Steve Jobs presented what he called “The App Store” to a captivated audience of tech enthusiasts, investors and app developers. This new market would create an unprecedented bridge between app users and app developers. Jobs noted, “The app store is going to be the exclusive way to distribute iPhone applications, directly to every iPhone user. Now, developers are going to ask, well this is great but what’s the deal? What’s the business deal? We think we got a great business deal for our developers… When we sell the app through the app store the developer gets 70% of the revenues right off the top. We keep 30[%] to pay for running the app store… This is the best deal going to distribute applications to mobile platforms.” Does the spirit of Apple’s goal to unite developers and users in a free market still exist today?
How could Jobs claim that a 30% fee on all sales is the “best deal?” After all, to this day Apple takes around $3, or 30%, off every in-app payment of $10. Contextually, Jobs was right on the money given the then-current application market. When the first iPhone was announced in June of 2007, most consumers were buying physical copies of applications and games. Between the shipping, physical components and retail store markups digital profit margins were often double that of retail sales. When Jobs offered to increase profit margins by 20%, nobody batted an eye.
During the inception of the App Store, there was one widely overlooked detail that would have major implications for the future of mobile applications. In a traditional market, producers would recognize the success of the Apple App Store and strive to create a better and cheaper store, say charging only a 15% fee on all sales. Apple shot down any notions of additional app stores on Apple devices citing quality control issues.
It is no secret that app developers have long detested this practice. Spotify app users who select the upgrade to “premium” button are told, “You can’t upgrade to premium in the app, we know it’s not ideal.” Netflix has a similar message, “You can’t sign up for Netflix in the app, we know it’s a hassle.” The reason this passive-aggressive messaging to Apple has been the only form of defiance is simply that getting into a legal battle with the world’s largest tech company outweighed the cost of Apple’s 30% fee.
Tim Sweeney, a tech billionaire and founder of Epic Games, saw the cost-benefit analysis a little differently. Having started his career by selling video games out of his parents’ house, Sweeney’s company pioneered the hit video game “Fortnite,” one of the biggest video games ever made. This multiplayer game allows participants to hang out with friends, dawn their characters with outlandish costumes and battle with or against one another. Sweeney and Epic Games are in a unique situation because Fortnite is not exclusively mobile and exists across various platforms such as PC, Xbox and PlayStation. This reduced reliance on the Apple App Store puts Epic Games in the best position to challenge the largest company in the world. “Well, you know, Epic is fighting this battle because we're, in some regards, uniquely positioned to do it,” Sweeney noted.
In a series of heated email exchanges starting in June 2020, Sweeney challenged Apple, first by demanding a lower fee, to which he was denied. After recognizing Apple’s unwillingness to waver in policy, Sweeney ended the conversation with Apple’s CEO, Tim Cook, “I’m writing to tell you that Epic will no longer adhere to Apple’s payment processing restrictions.”
Epic Games gave customers the choice of paying in-app through Epic or through Apple. Customers that chose the former would have the savings passed onto them in the form of lower prices. Simply put, virtual banana costumes were now 30% off. Apple immediately pulled Fortnite from the App Store and Google followed in kind.
Epic Games responded by rallying the Twitterverse against Apple with the Hashtag “FreeFortnite”. On August 13 they also launched an ad parodying one of Apple’s most famous commercials based on the famed novel “1984.” This campaign was meant to highlight the shackles Apple had placed on the consumer and Fortnite’s inevitable liberation. This declaration of war followed by Epic Games suing and Apple countersuing, creating one of the most important legal landmarks in the world of antitrust.
Antitrust laws refer to the regulation of monopoly power and competition. Legal antitrust disputes have been at the forefront of the American public’s mind due to the growing power of large tech companies. The legal decision made in the courts may set a precedent for future verdicts and show how far the legal system is willing to go to break up monopolies.
In order to clinch this landmark case, Epic Games must prove their conception of the parameters of the market and that Apple has monopolistic control over this market. Determining what the market size is not as simple as it sounds. Epic claims that the market in question is the market for apps on the iPhone. If this is successfully proven then it is clear that Apple has 100% control over the market. Apple contends that the relevant market is the market for apps on all smartphones. If one does not want to use the App Store, Android is always a relevant option. And with Apple only controlling around 25% of the worldwide smartphone market, a monopoly would be much harder to prove if the market was determined to be all apps on all phones.
Even if Epics Games proves their conception of the relevant market, they would still have to prove that Apple has misused its power to hurt the consumer and competition. This means that the court would have to agree that the 30% bottleneck causes unwarranted cost on the app developers which in turn causes them to pass that cost onto consumers. Apple asserts that this 30% pays to keep the App Store a safe place for consumers. On the producer side, app developers benefit from the trust iPhone users have in the app store.
Many large companies find themselves in the same place as Apple. A two-sided market, or a market that facilitates direct commerce between producers and consumers through an intermediary platform, is the business model that is being called into question by antitrust lawsuits. Amazon connects buyers to sellers, Uber connects wayfarers to drivers and Airbnb connects tourists to hosts, just like Apple connects gamers to developers. The fundamental question of competition arises, especially in this business model, as to whether the market is still competitive or if it needs to be regulated. The case between Apple and Epic Games is the essence of what the antitrust concerns are today. The verdict could determine what courts will be willing to do for future antitrust lawsuits. In the face of the potential crumbling of competition, only lady justice will be able to tell the world who will win this battle royal.
Photo Caption: Gamers across the globe directly feel the effects of Epic Games’ and Apple’s antitrust lawsuit as the app is unavailable for play on all Apple devices.
Photo Credit: Pixabay
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