Understanding the Epic Games V Apple Inc. Dispute

THE DISPUTE

 On the morning of August 13, 2020 for the first time, Apple mobile device users were offered competitive choice. Epic added a direct payment option to its popular game Fortnite, giving players the option to continue making purchases using Apple’s payment processor or to use Epic’s direct payment system which in turn enabled Epic to pass along its cost Savings by offering its users a 20 % reduction in in-app prices as shown below. Fortnite users on iOS, for the first time, had a competitive alternative to Apple’s Payment solution, 

 Apple responded by removing Fortnite from sale on the App Store, which means that new users cannot download the app, and users who have already downloaded prior versions of the app from the App Store cannot update it to the latest version.

THE CAUSE

Apple Maintains its monopoly in 2 distinct multibillion-dollar markets iOS App Distribution Market and iOS Payment Processing Market by the imposition of certain contractual and policy restrictions. Developers have to rely on a Single store controlled by Apple, The App Store where apple exacts an oppressive 30% tax on the sale of every App. In Contrast Software developers can make their products available to users of an apple personal computer (Mac, MacBook, iMac) in an open market, through a variety of stores, or even Through Direct download from a developers website with a variety of payment options and competitive processing fees that Averages Around 3 % (Both PayPal and Stripe charge 2.9%, while Square charges between 2.6. % to 3.5. %) a full 10 times lower than the exorbitant 30 % that Apple charges. It could never impose such restrictions in the Mac Ecosystem as it does not enjoy the same dominance in the sale of devices as it does in iOS.

 IMPORTANCE OF iOS FOR APP DEVELOPERS

⁃   1.5 Billion Active users (Both iPHONE & iPAD) 

⁃   iOS Users spend twice as much money on apps compared to android users. That translates into 1.5 Billion High Paying App Users using iOS.

⁃   25 % Mobile Operating system (Smartphones & Tablets run iOS 

⁃   Global iPhone Sales in 2019 generated $142 B billion in Revenue for Apple

⁃   Since its launch in 2007 iPhones have maintained substantial profit margins between 60 - 74%

⁃   Global iPad Sales generated $19 Billion in 2019 and account for 38% of global tablet shipment.

 iOS App Distribution Market

Apple completely bans any app that could compete with Apple for the distribution of app in iOS

⁃ Through its control over iOS

⁃ Through a Variety of Unlawful contractual restriction that it forces app developers to accept (Oppressive terms and conditions)

⁃ Prevents users from downloading the app from any other source than apples own App Store.

⁃ Remits 70% of the payment to app developers and retains 30% tax for itself

⁃ Developers have to increase the price they charge consumers in order to pay apple tax 

⁃ No way to avoid this tax as apple has foreclosed any alternative way to reach the over 1 billion users of iOS

IMPACT

 APP DISTRIBUTORS - who are foreclosed from competing with apple and innovating new methods of distributing iOS app to users outside the App Store ( like curated App Store targeting particular niches like Travel or Gaming apps). For eg. Apple unequivocally refused to allow Facebook to distribute its competing game store on the app store. Ultimately Facebook caved under Apple’s power and removed the ability to play games on its app, limiting it to a simple video game streaming service. Similarly, Apple rejected Microsoft’s xCloud gaming service for violating Apple’s Policy. 

APP DEVELOPERS – are forced to shell out more of their revenue on paid apps than they would if Apple faced competition

CONSUMERS - are forced to pay higher prices for the Apps and inferior customer service

 iOS PAYMENT PROCESSING 

Apple requires software (App) developers who wish to sell digital in-app content to those consumers to use a single payment processing option offered by Apple. It imposes unreasonable restraint and unlawfully maintains a total monopoly in the iOS In-App Payment processing market. Apple coerces all App Developers to

⁃ Use exclusively apples own payment processing platform for all in-app purchases of in-app content

⁃  App Developers have to Agree that they will not even offer a choice of additional payment processing option alongside apple

⁃  Gags App Developers, preventing them from even mentioning to use the option of buying the same content outside of the App. For eg Apple’s General counsel wrote to Spotify and threatened to remove the Spotify app from the App Store for advertising free trials to its own customers. Apple decreed “ What a developer cannot do is seek to use its iOS app as a marketing tool to redirect customers outside of the app to avoid in-app purchases.

 Hence, Apple is the SOLE PAYMENT PROCESSOR and Positions itself between developers and consumers

 IMPACT

OTHER PAYMENT PROCESSORS - are foreclosed from competing with Apple on price and innovating new methods of in-app payment processing (Reward Points, Carrier billing)

APP DEVELOPERS - are denied choice and have to pay Apple Tax. Of 30% - set by fiat - rather than by competitive market forces

CONSUMERS - are also denied choice and suffer higher prices and inferior services.

THE CASE

In this case, Epic did not seek any monetary compensation for injuries it has suffered nor favorable treatment for itself, as a company. Instead Epic sought Injunctive Relief to allow fair competition In these 2 key markets that directly affect more than a billion consumers and tens of thousands of third-party app developers. Faegre Drinker Biddle & Reath LLP and Cravath, Swaine & Moore LLP were attorneys for the Plaintiff Epic Games, Inc. The case was filed in the United States District Court of Northern District of California.

DR PRASHANT PRATAP