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Epic vs. Apple trial

Lead image courtesy of Epic Games

On Monday, U.S. District Judge Yvonne Gonzalez Rogers began hearing arguments in the antitrust case that Epic Games, the studio behind Fortnite, has brought against Apple.

The questions at face value: Is Apple running a monopoly with its App Store? Should it be allowed to take 30% of revenue from every purchase made through Apple's in-app purchase system?

  • The case could force Apple to change the business model of its App Store and potentially the entire ecosystem of iOS. Depending on the outcome, it could change how smartphone and tablet apps work, how companies are able to distribute them, and the relationships allowed between buyers and sellers. Regardless of the exact outcome, this lawsuit could also prompt lawmakers to pursue more aggressive antitrust legislation in the U.S. and abroad.

The questions under the surface: Will people continue to be able to choose a smartphone with a "walled garden" ecosystem with uniform quality standards for software? No such ecosystem exists for computer software. And like the computer software marketplace, the outcome of such an environment would likely be cheaper apps but with less quality control and security — will this make people better off?

Background: Epic Games is the creator of Fortnite, one of the most popular video games on the planet. At its most basic, Fortnite is a free battle royale-style game, but it now doubles as a social world (sometimes referred to as a "metaverse") in which virtual events take place.

In Aug. 2020, Epic Games launched an update to the Fortnite iOS app that allowed gamers to bypass Apple's payment system and pay Epic directly, violating the terms of service for the App Store. In response, Apple removed Fortnite from its App Store and cut off Epic's access to its Mac and iOS developer accounts, prompting Epic Games to sue Apple (a judge later ordered Apple to restore access to the developer accounts).

Epic's side: Apple's App Store is the only way to install apps on the iOS operating system. Apple says this protects the ecosystem of iOS and the security of its users. Epic alleges that Apple is using this position as a means to thwart competition and run a monopoly. In addition to taking a 30% cut from initial purchases in the App Store and subsequent in-app purchases, developers have to follow rules laid out by Apple and be approved on the App Store before anyone is able to install their software. Epic hopes to be given license to run its own payments and distribution platform within iOS — separate from the Apple App Store.

  • The U.S. smartphone operating system market is split evenly between Apple and Google (owner of the Android operating system). The overall market is a duopoly, but Epic claims that the "market" in this suit should be defined more narrowly as just iOS.

  • According to the Federal Trade Commission (FTC), U.S. law prohibits monopolies from "tying the sale of two products." In specific, it seeks to stop a monopolist from using "forced buying, or 'tie-in' sales, to gain sales in other markets where it is not dominant and to make it more difficult for rivals in those markets to obtain sales." Epic is essentially claiming that the App Store marketplace and the payment system are two separate products that have been tied together in a way that abuses its power and deters competition.

  • On PCs, consumers have a variety of ways to download (and therefore pay for) software, which gives developers more control over which payment systems they use. Epic is pointing to this as precedent that should be applied to the smartphone and tablet market.

Apple's side: Apple claims that Epic's definition of the market is too narrow. The market for a game like Fortnite, for example, extends beyond iPhones because it can be played on Android phones, PCs, and gaming consoles (i.e., PlayStation).

Apple holds that the payment processing system it uses on the App Store is part of a single service, rather than two separate products. In this read, there would be no "tying."

Apple further points out that Google's Play Store (the Android app marketplace) functions on the same business model as the App Store — and that Android also removed the Fortnite app from its Play Store when the game launched its "Epic Direct Payment" system.

For Epic to win: The company will need to prove that iOS should be regarded as its own market, not one of multiple competing operating systems, and that Apple's use of the App Store, which requires app developers to use its proprietary payment system, is in violation of antitrust laws.

At stake: If Epic wins, the court could force Apple to open up iOS and the App Store, which would turn the iPhone into something more like a traditional computer. This would effectively open the floodgates for other developers to take the same route with their software, which could take a considerable cut of Apple's App Store revenue. More globally, it would also mean that there would no longer be a smartphone operating system with tightly controlled quality standards.

And even if Apple does win, the case comes at a time of intense public scrutiny around the power held by Big Tech. How the case is determined could also theoretically prompt new antitrust lawsuits (such as the current FTC antitrust lawsuit against Facebook) or the creation of new antitrust legislation in the U.S. and abroad. On April 30, for example, the European Union accused Apple of violating antitrust laws, following a complaint by Spotify.

The trial: Epic and Apple both agreed to a "bench trial," so there is no jury. This case will be decided entirely by Rogers and how she interprets antitrust laws. It takes place in Oakland and is expected to take three weeks. At the time of this writing, two dial-in numbers are listed for audio access to the trial.

The verdict is sure to be appealed, either way, and the case may take years — the federal government's famous antitrust suit against Microsoft (for bundling Internet Explorer with Windows) began in 1998 and took three years to resolve after the initial verdict was overturned.

We'd love to hear from you! If you have a comment about this article or if you have a tip for a future Freethink story, please email us at [email protected].

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