App Store Context and Epic Games’ Plan for a Coup

By every measure, the iPhone was a groundbreaking success from introduction. Despite the introduction being held together by shoestrings and duct tape, it turns out every human on earth wanted a handheld computer in their palm. Initially, the iPhone offered no ability to run any third party applications, offering only those built into the iPhone itself. This prompted an entire ecosystem of jailbreaking iPhones for many reasons, but primarily to enable users to install other applications.

In response, Apple introduced the App Store on July 10, 2008 with an original set of 500 applications. However, the App Store has come with an ongoing list of limitations. Apps on the store must operate under a growing number of rules regarding pricing, structure, and content. The most relevant of those rules for this discussion being the use of uniform pricing (e.g. pricing ending in $X.99), any in-app purchases for an application being processed through the Apple App Store payment processor, and any subscription models likewise reliant upon payment through the same App Store payment processor. Failure to comply with these rules results in de-listing from the Apple App Store. Given that Apple iPhones and iPads are the second-largest App Stores on the planet for number of users, and are by far the largest by sales volume, delisting an application from the App Store can mean certain death for most mobile device software developers. The vast majority of application developers for iPhone and Android cannot bear the financial risk to their businesses of delisting from the App Store. There are no other app stores allowed on iOS products like the iPhone and, short of jailbreaking, there is no other way to get applications onto the iPhone.

Finally, and most importantly, Apple adopted a payment model from other online app stores like Valve’s Steam, iTunes itself and the model used by video game console manufacturers like Nintendo, Sony, and Microsoft that imposes a 30% “tax” for all transactions conducted on the platform. In the context of, for example, a Nintendo Switch which is sold effectively at cost or below cost, Nintendo imposes a 30% of gross revenue cost on all video game sellers who sell on the platform in order to recoup the development and manufacturing costs and to actually turn a profit. Apple thought this model the most-alike its iPhone business model and adopted it as well. Google followed suit with its Android Play Store.

Initially, the boon to software developers was sufficiently huge that the vast majority did not mind at all. Those that were successful were making gobs of money anyway. But, over time, the payment models used by Valve, iTunes and the video game console manufacturers have given way to smaller “cuts.” Epic undercut Valve by offering a 90/10 split, rather than the 70/30 split, and Valve responded by almost-matching. Epic also began giving away free, high-quality games each month on its own PC App Store and has continued doing so for near two years to lure new users there.

Meanwhile, Epic Games which had existed in various forms for nearly twenty years had a huge hit game in 2018 in the form of Fortnite. The game has generated billions of dollars a year since its inception for Epic. It is primarily a PC game, but was also available on Apple’s iOS and Google’s Android platforms. This put Epic in a unique position. First, it wanted to compete with Valve to have a PC-based App Store, so it has begun creating that store. Second, it made tons of money, most of which did not depend on Apple, so it could pick a fight without losing too much of its revenue. Epic began planning for Project Liberty.

Epic Strikes and Apple Responds

In essence, Project Liberty was Epic’s multi-phased plan to force Apple and Google to change its App Store monetary splits and to open their ecosystem to competing app stores. The first phase was to purposefully have the Fortnite app violate the App Store rules by incorporating a separate payment system – Epic’s payment system – within them, and to offer a 20% price discount over the prices including the 30% “Apple tax” to encourage users to use Epic’s system. Either Apple would acquiesce or would pull the application from the App Store. If the former, Epic would be happy and priced as they wanted. If the latter, Epic would initiate an anti-trust lawsuit against Apple for violating anti-steering provisions effectively barring companies from using monopoly power to force users to use a single service or system.

On August 13, 2020, Epic put its plan into action, including a video mocking Apple’s own famous 1984 commercial which had pitted Apple as the rebel against the IBM behemoth.

Apple took down Fortnite for violating its App Store rules and Epic filed a 170 page complaint that same day (don’t read it).

The District Court Delivers a Mixed Decision

The docket for the lawsuit presently has 850 entries. A savvy federal court litigator will know that a typical case has perhaps 100 to 300 entries. This was an Epically fought battle. The stakes at issue are potentially huge.

For Apple:

• It’s business model for its flagship iPhone product, which results in the lion’s share of its revenue ($85.1 Billion in 2021 was in the App Store, total revenue was $378.32 Billion).
• Its ability to control and protect the ecosystem it has built. Theoretically, allowing any App Store to flourish would degrade Apple’s image as protective of its customer’s privacy and generally higher security than its competitor, Android. The truth of that positioning is certainly arguable, but it is a market differentiator that Apple has relied upon for some time.
• The generalized question of whether a platform holder (e.g. Nintendo, Windows, Garmin, etc.) can maintain control over their respective “app stores” or if everyone has to have “open” devices or perhaps only if those entities are “monopolies.”

For Epic:

• It’s market penetration and ability to offer its own payment and app stores on iOS and Google’s Play Store.
• It’s ability to launch – as it seems it plans – a computer and mobile device wide single App Store with a relatively low 10% (at present) revenue share for developers on that store.
• It’s reputation and a relatively short window in which it potentially can complete this process. Video games are a hit-driven business. Fortnite remains a huge moneymaker, but will not be one forever. For now, Epic effectively prints money, so it can maintain this dispute for the foreseeable future.

Epic’s suit took a year and a half to wind through to completion. Judge Yvonne Gonzalez Rogers strongly requested that the parties consider resolution by settlement and the entire industry held its breath waiting on a decision. The decision came in a Rule 52 Judgment on the Merits (skim this) and the entry of a permanent injunction (read this) against Apple. In short, Epic failed to prove that Apple was a monopoly in App Stores. It sought to show that Apple was a monopoly because it owned the entire ecosystem on its own iPhone platform and, therefore, 100% of the market. Apple argued that the marketplace for purposes of monopoly law was “mobile devices” and it held a 55% market share during the relevant time period and therefore the market was healthy. The court sided with Apple on the market definition and declined to issue an injunction requiring Apple to offer or enable alternative app stores on its iOS devices. However, the court did find that Apple was in violation of anti-steering provisions under California law by only enabling use of Apple’s payment platform on iOS and refusing to allow others. The permanent injunction required Apple to allow alternative methods of payment. Both parties appealed their respective losses.

Things Look Mixed on Appeal

On appeal, the U.S. Department of Justice joined in on the side of Epic arguing that Apple was in fact a monopolist. The Attorneys General of 35 states likewise filed amicus briefs in support of Epic. At least sixteen amicus curiae briefs were filed by various entities. In general, the tide of public opinion has turned against “big tech” over the course of the last several years and Apple appears to be one of the most prominent targets. The 9th Circuit even granted the DOJ the opportunity to participate in the 75 minute oral argument. Apple’s brief and Epic’s brief are both nearly 200 pages (skim these).

Those who listened came away with two main points: (1) the decision below was mixed and may have misapplied the law, but (2) Epic’s evidence is likely a “failure of proof” regarding Apple being a monopolist. Ultimately, issue 2 may torpedo any success for Epic on appeal. It was less-clear whether Apple successfully convinced the panel that it need not offer alternative payment systems on its platform. It appears less-likely that issue will be reversed. It is unlikely, but possible, that the Supreme Court would take up the case. Despite the case’s magnitude, the issues are not particularly novel and the Supreme Court’s current makeup would likely affirm or substantially affirm the current district court decision.

Jonathan Pearce, the author of this post, will lead a discussion of this case at our weekly SoCal IP Institute Meeting on December 5, 2022.