Fortnite takes on Apple’s App Store in Epic antitrust battle royale

18.08.2020

Apple’s App Store has been in the antitrust spotlight in Europe for a while now, since Spotify issued a formal complaint to the European Commission in March 2019 about the 30% commission Apple charges developers for in-app purchases (here). The issue bubbled away for some time, with the Commission ultimately deciding to open an investigation in June 2020 (here), looking specifically at (i) the mandatory use of Apple’s own proprietary in-app purchase system for the distribution of paid digital content, and (ii) restrictions on the ability of developers to inform users of alternative purchasing possibilities outside of the apps.

Epic Games, the company behind the global phenomenon battle royale game Fortnite, has now significantly raised the stakes by drawing Apple in to an antitrust lawsuit issued in California. In what appears to have been a calculated decision to provoke a dispute, on the morning of 13 August 2020, Epic added its own direct in-app payment functionality into the version of Fortnite available on iOS, in contravention of the terms of use Apple imposes in its Developer Agreements.  Apple immediately removed Fortnite from the App Store, meaning that iOS device users can no longer install or update Fortnite.

In response, later that same day, Epic filed a 65 page antitrust suit in the Northern District of California (one suspects this might have been prepared in advance). It also launched a social media campaign with the hashtag #freefortnite, complete with an advert parodying the 1984-esque Apple v IBM advert that Apple had used to launch the Macintosh back in the 1980s.

Clearly, Epic was expecting a fight and has come out swinging.  A quick look at the numbers involved suggests why – a recent report indicates that more than $1bn has been spent on the App Store on the mobile version of Fortnite in the two years since its release. With Apple taking a 30% cut of that revenue, there are huge sums at stake here.

The basis for Epic’s claim

Epic’s complaint alleges that Apple has violated the Sherman Act through anti-competitive behaviour in two separate markets (i) the iOS App Distribution Market, and (ii) the iOS In-App Payment Processing Market.

  1. App distribution. Epic says that Apple prohibits developers from selling or distributing iOS apps unless they use Apple’s App Store.  Apple collects the payments when consumers purchase apps and remits only 70% of that to the developers, keeping 30% of the fee for itself. Accordingly, Epic says that iOS developers are forced to increase the prices they charge consumers in order to pay this ‘tax’ charged by Apple.  Epic also alleges that because developers are required to agree to distribute apps solely through the App Store, developers cannot compete with Apple by innovating new methods of distributing iOS apps to users.
  2. In-app payment. Epic says that app developers are required to use Apple’s own payment processing platform for any in-app purchases, and that Apple charges a 30% fee on all such payments.  Apple also requires third-party app developers to agree they will not offer iOS users the choice of additional payment processing options alongside Apple’s, and prevents developers from informing iOS users of the option of buying the same content outside of the app (directly from the developer, or through a web browser). Epic points out that a typical payment processing platform fee is 3% rather than 30%, and notes that these kinds of restrictions do not apply to purchases on Apple Macs, only on iOS devices. It says the result is that other payment processors are foreclosed from competing with Apple, developers are forced to pay Apple’s fee rather than being able to innovate or utilise other payment options, and consumers are denied choice, innovation and suffer higher prices as a result.

Epic does not seek monetary relief, but asks for an injunction compelling Apple to cease these practices. Epic has issued a complaint against Google’s Play Store which is similar but not identical, as, unlike with iOS, third party app stores can be used on Android.

Comment

As with many recent big tech cases and investigations, this claim raises novel issues. It is perhaps helpful for Epic that the European Commission’s Android decision (here) distinguished between licensable smart mobile operating systems (Android) and non-licensable ones (iOS). Although the decision of an EU regulator based on an interpretation of EU competition law is of limited relevance to a US court applying US laws, it nevertheless offers some support for the narrow, iOS specific market definitions that Epic has adopted.

The level of preparatory work and coordination that has gone into Epic’s claim sets a new benchmark for antitrust complaints (at the time of writing, the accompanying video has racked up more than 5 million views on YouTube). Use of the hashtag #freefortnite suggests that in addition to being willing to spend significant sums on this dispute, Epic is prepared to stake Fortnite’s reputation against Apple’s by steering the dispute into one which is as much about PR as it is the underlying antitrust laws. Epic also may not be alone in this fight.  Facebook has made two public complaints about Apple’s App Store during the last month in relation to its new ‘Facebook Gaming’ app which Apple initially rejected, and in relation to Facebook’s new paid online events feature, which it wanted to keep free for the next year to help events businesses struggling during COVID-19.  Apple refused to waive the 30% App Store commission or to allow Facebook to utilise Facebook Pay.  (Read more about both of these complaints here and here.)

The pressure on Epic, Apple and the US courts to resolve this dispute will soon mount further as  Fortnite’s forthcoming update (known as Chapter 2 Season 4) is due to commence on Thursday 27th August. Millions of iOS and Android players will not be able to update their apps and so will miss out on the new content implemented into the game. Epic is no doubt hoping to capitalise on the resulting public outcry, but this could backfire if Apple stands its ground and attempts to drag this dispute out causing Epic to lose millions in mobile revenue. Epic is no newcomer to this kind of battle though. Last year it entered into a war with Steam, the leading digital marketplace for PC games, by creating its own Epic Games Store.  Epic proceeded to cut the standard revenue taken from developers from 30% to 12%, and entered into exclusive deals to sell and host a number of AAA games on its store. Steam had been the dominant PC marketplace for 15 years with no real competition and Epic certainly upset that balance.

However, the early indications are that Apple is prepared to be just as aggressive as Epic.  According to an application for a preliminary injunction that Epic has filed on 17th August, Apple has threatened “to cut off Epic’s access to all development tools necessary to create software for Apple’s platforms—including for the Unreal Engine Epic offers to third-party developers, which Apple has never claimed violated any Apple policy.”  This is a significant escalation. As Epic’s application points out, the Unreal Engine is used not just for apps but to render the graphics in hundreds of video games (and other media; Unreal Engine 4 was used to generate Baby Yoda in Disney’s The Mandalorian). Epic says it will be forced to discontinue Unreal Engine from iOS and MacOS if Apple does terminate Epic’s access to development tools.

The consequences of this lawsuit are potentially vast. As noted above, there are hundreds of millions of dollars at stake with respect to Fortnite.  However, if Epic succeeds in its claim, and Apple is compelled to enable other app stores to distribute iOS apps, or to accept alternative in-app payment processors, it threatens Apple’s cut of the approximately $50b that is spent annually on the App Store. This is certainly going to be a case worth watching.

Stephen Smith

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Charles Purdie

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Matthew Hunt

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