Apple’s battle with Epic Games could lead to big changes in iPhone apps

September 28 • 5:45 pm

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Apple’s iPhone is already one of the world’s most litigated devices. Apple fought its No. 1 rival, Samsung, and others over the iPhone’s design. It’s fought phone giant Nokia and chipmaker Qualcomm over patent royalties. Before the smartphone first went on sale in 2007, Apple even fought networking giant Cisco over the iPhone name.

On Monday, Apple meets a new combatant in court. This time, it’s fighting Epic Games, maker of the online gaming phenomenon Fortnite, which has more than 350 million players. Epic sued on Aug. 13, alleging that the iPhone maker’s rules — for how big a cut of app sales developers need to pay Apple, and how they can even make money on the popular App Store — are anticompetitive. The suit effectively forces Apple to defend the way it operates its App Store, the only gateway for developers who want to have their apps made available for download on the iPhone.

To prove its point, Epic intentionally broke Apple’s rules, which say that for in-app purchases, app developers can only use Apple’s payments processing service. In-app purchases are the add-ons, like digital tokens, that players can buy to get different clothes or designs for their digital characters and weapons. Developers, especially the ones who offer free-for-download apps like Fortnite, rely on those in-app purchases as a key source of income. On that August Thursday, Epic turned on hidden code in its Fortnite battle game, letting users buy items directly from Epic at a discount, rather than pay full price through Apple’s payments service.

By letting users pay Epic directly, instead of through Apple’s payment service, Epic also circumvented the commission of up to 30% on each sale that Apple charges developers for the privilege of their wares being available to iPhone users on the App Store.

Apple quickly banned Fortnite from its App Store, and Epic sued in response, kicking off a legal battle that’s grabbed the attention of both the game industry and millions of app developers, all of whose businesses could change as a result of whatever happens. The App Store, launched in June 2008, has grown to more than 1.85 million apps, according to September data from research firm Statista. It’s attracted more than 27 million app developers, whose programs have been downloaded by about 1 billion people across 175 countries. Apple is estimated to have paid out $37 billion to developers last year, according to industry watcher Sensor Tower. Assuming Apple took a 30 percent cut, that puts App Store sales at about $55.5 billion.

“There’s good arguments on both sides,” said David Olson, a professor at Boston College Law School who closely tracks antitrust, intellectual property and patent law. What makes this case in particular stand out, he said, is it raises thorny questions around how much Apple is allowed to control its platform, an issue that’s been debated online for years but not so much in the courts. “This could be huge.”

Apple and Epic didn’t respond to requests for comment.

What’s at stake for Apple is how apps are distributed and monetized across mobile devices. Apple, in particular, has demanded it approve every app that’s offered for sale for its iPhone since the beginning, with its App Store serving as the only distribution platform for iPhone app developers. Apple also touts that control as a feature in its marketing, promising iPhone users they can trust any app they download from the App Store because it’s already been vetted.

Aside from charging an up to 30% fee for in-app purchases, Apple requires app developers to follow policies against what it deems objectionable content, such as pornography, encouraging drug use, or realistic portrayals of death and violence. Apple also scans for security issues, spam and apps that could be used to take data from people’s phones without their consent.

“Apple’s requirement that every iOS app undergo rigorous, human-assisted review — with reviewers representing 81 languages vetting on average 100,000 submissions per week — is critical to its ability to maintain the App Store as a secure and trusted platform for consumers to discover and download software,” the company said in one of its filings.

That trust, and the App Store brand, is so important to Apple that it even fought Amazon and Microsoft over the use of the name “App Store.” (Apple ultimately backed down.)

The App Store’s policies have almost always been at the center of controversy for Apple too. Apple’s tight control is an instinct that came from its co-founder and former CEO Steve Jobs, who micromanaged the look and feel of the company’s software and hardware, sometimes down to the smallest dot on the screen, the angle of the curves on its devices and the satisfying click-feeling you get when you plug in a cord.

That obsessively controlling approach has ticked off developers over the years. They say Apple’s inflexible rules over everything from content (Apple once banned an app from a Pulitzer-winning cartoonist) to the ways programs talk to the internet, give the iPhone maker too much control over other companies. And in July, legislators on Capitol Hill called in Apple CEO Tim Cook, alongside leaders of Facebook, Amazon and Google parent Alphabet, to defend those and other policies.

Epic isn’t the only developer that disagrees with Apple. More than a dozen companies, including music service Spotify and dating app maker Match Group, joined with Epic to found a group called the Coalition for App Fairness to take on Apple’s rules.

“As enforcers, regulators, and legislators around the world investigate Apple for its anti-competitive behavior, The Coalition for App Fairness will be the voice of app and game developers in the effort to protect consumer choice and create a level playing field for all,” Horacio Gutierrez, head of global affairs at Spotify, said in a statement on Thursday. Spotify also helped kick off EU investigations of Apple this summer after the music service complained to European regulators about the company’s policies.

On Monday, Apple and Epic Games are set to meet in an online version of what would have been an Oakland, California, courtroom, a reminder that despite the coronavirus pandemic that’s infected more than 32 million people and killed at least 990,000 around the world, big fights between big tech companies still go on.

Epic argues that Apple’s strict control of its App Store is anticompetitive and that the court should force the company to allow alternative app stores and payment processors on its phones, remaking the way people get and pay for iPhone apps. “Apple is bigger, more powerful, more entrenched and more pernicious than monopolies of yesteryear,” Epic said in an August legal filing. “Apple’s size and reach far exceeds that of any technology monopolist in history.”

Apple responded, saying Epic’s lawsuit is just a disagreement over money. “Although Epic portrays itself as a modern corporate Robin Hood,” Apple wrote in its legal response, “In reality it is a multibillion-dollar enterprise that simply wants to pay nothing for the tremendous value it derives from the App Store.”

Epic battle

Apple and Epic Games used to be friends. A decade ago, Apple invited the software developer on stage at one of its events to show off Project Sword, a game later called Infinity Blade, designed to show off how Epic’s Unreal Engine tools could be used to create beautiful and intricately designed games.

Apple brought Epic back on stage in 2011 to show off its sequel, Infinity Blade 2 (game). And then again in 2013 for the second sequel, Infinity Blade 3. Each game was considered a success, and largely well received.

“Of all the many thousands of games to hit iOS over the years, Infinity Blade and Infinity Blade II were among the few that aspired to be something greater than mere mobile games,” CNET sister site GameSpot’s Mark Walton wrote in his 2013 review of the games. “Their visuals were — and indeed still are — some of the most impressive to grace the platform, and both offered a surprising amount of depth behind their flashy touchscreen swordplay.”

As Epic grew into a multibillion-dollar company, it began using its size to push for change within the game industry. In 2015, Epic began offering its Unreal Engine game development tools for free, taking a 5% royalty fee on games sold. This year, it said it would charge game royalties only after a developer’s first $1 million in revenue.

“They want to be a company that empowers creators,” said Ben Wiley, program director of game production at Champlain College in Vermont, who formerly worked at Warner Bros.

Epic’s most controversial move came in 2018, when the company opened its Epic Games Store for PCs, a competitor to the industry-leading Valve Steam store. Though the Epic store didn’t have the same social networking, reviews and other features Valve’s did, it asked for only a 12% commission from game developers, less than half the industry-standard 30%.

To win over developers even further, Epic started paying for and securing exclusivity deals for PC games, effectively locking the titles to its Epic Games Store usually for a year. Some of those exclusives were highly anticipated titles like Gearbox Software’s sci-fi shooter Borderlands 3, Deep Silver’s postapocalyptic thriller Metro: Exodus and the epic story game Shenmu 3.

As Epic’s roster of exclusive titles grew, some players bristled at being forced to sign up for yet another online service in order to play games they’re excited about.

“I wish there were a more popular way to do this,” Tim Sweeney, Epic’s CEO, said in a 2019 interview with CNET. But a survey by the Game Developers Conference, released just before our interview, underscored Sweeney’s point, finding, among other things, that a majority of game developers weren’t sure Valve’s Steam justified its 30% cut of revenue. “I feel like the ends are more than worth the means,” Sweeney said.

Now Epic is taking its fight to Apple, and fighting a different app store for mobile devices. In emails between the two companies before the lawsuit was filed, Sweeney asked Apple to allow Epic to create its own app store for mobile devices too, and to use its own payment processing service. Apple refused.

Apple fight

Epic isn’t just fighting Apple in the courts. It’s also devised a PR campaign to bring that fight to the public.

The same day Fortnite was kicked off the App Store, and after Epic sued, the company released an ad parodying Apple’s famous Ridley Scott-directed 1984 Macintosh Super Bowl ad. The original positioned Apple as a revolutionary, fighting back against a Big Brother conformist overlord-type figure.

Epic’s remaking, called Nineteen Eighty-Fortnite, paints Apple as the domineering Big Brother, and shows a Fortnite character fighting back.

“Epic Games has defied the App Store Monopoly. In retaliation, Apple is blocking Fortnite from a billion devices,” Epic wrote at the end of its 48-second video. “Join the fight to stop 2020 from becoming ‘1984’” In the month since the video’s release, it’s been watched more than 6 million times.

Apple says the commission it charges pays for the tools, people and computing costs to run its App Store. The company also says its control protects users from potentially bad behavior and fraud, too.

Neither company’s arguments appear to have swung the court of public opinion much. Analysts say the whole thing really boils down to a slap-fight over money between a multitrillion-dollar company and a multibillion-dollar company.

“Epic’s being self-serving by saying it’s protecting the little guy, and Apple’s being self-serving by saying it’s protecting consumers,” said Joost van Dreunen, a professor at NYU Stern School of Business and author of the upcoming book One Up: Creativity, Competition, and the Global Business of Video Games. Regardless of how this lawsuit goes, he said, Apple’s continuing challenge will be to convince developers the App Store is worth that 30% fee.

In the game industry, console makers justify their cut of games sold by using the money to help market their products and grow the number of people playing even more, van Dreunen said. Console makers also tend to take less of a cut the larger a company’s sales get.

“It’s baked into the habit of the industry that it’s acceptable,” he added. But van Dreunen said that now, with more than a decade of Apple being as inflexible as developers have said it is, pushback is inevitable.

Apple isn’t the only company Epic targeted in its Fortnite battle. The same day Epic broke Apple’s App Store rules, turning on the same hidden payment service in its game on the Google Play Store, for devices powered by Google’s Android software. Google kicked Fortnite out of its store too, and Epic sued, arguing that Google has strayed from the Don’t Be Evil mantra of its early years.

Google has since reportedly begun plans to tighten its app store rules, in seeming support of Apple. A report in Bloomberg last week said the company is planning to tell developers they need to use Google’s payments processing service, which has an up to 30% commission just like Apple’s App Store.

In the meantime, the first court skirmishes between Apple and Epic have scored legal wins for both companies. In an emergency hearing in August, a district judge in Northern California agreed that Apple could keep Fortnite off its App Store during the lawsuit. She also ruled that Epic should be able to continue distributing its Unreal game tools to developers without interference from Apple, for now.

The risk that Apple could lose the case and potentially set a precedent that upends how all app stores work across the tech industry will likely drive the company to settle. But it’s also why Olson, the law professor, is hoping for the case to drag on a bit. He wants to see how Apple, Epic and the court attempt to apply antitrust laws from decades ago to modern-day tech.

Apple’s battle with Epic Games could lead to big changes in iPhone apps

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