Apple and Fortnite creator Epic Games on May 3 kicked off a court battle with far-reaching
implications for the mobile app market.
Source: Epic Games.
Apple Inc. and Fortnite game developer Epic Games Inc. kicked off opening arguments May 3 in a high-stakes court battle over how payments are collected and shared on mobile app stores.
The trial, which is expected to last three weeks, is aimed at determining whether Apple’s policies have resulted in an Apple monopoly over the digital payments landscape, as Epic alleges. These policies include a 30% commission charged to app developers who use Apple’s iOS store and a restriction that prevents iOS mobile users from downloading apps outside of its App Store. In August 2020, Epic sued Apple for removing the popular Fortnite games from the App Store after Epic launched its own in-game purchasing feature in an apparent attempt to sidestep Apple’s commission fees.
Though analysts largely expect Apple to prevail in court, a win for Epic would have extensive ramifications, including redefining the market for digital transactions and cutting into Apple’s services revenue should developers and consumers win the right to seek out alternatives to Apple’s App Store.
The App Store is included within Apple’s broader services business, which also comprises Apple Music, video services and cloud offerings. While Apple does not provide specific sales figures for the App Store, net sales in the company’s services business came to $16.90 billion for the March quarter and comprised about 19% of Apple’s total net sales in the period.
Mobile research company SensorTower estimated that Apple generated $72.3 billion in revenue from its App Store in 2020, up 30.3% from $55.5 billion in 2019.
Avi Greengart, founder and lead analyst at market research and advisory firm Techsponential, said it could be difficult for Epic to clearly define the scope of the digital payments market and over what portion of that market Apple runs an alleged monopoly. Greengart considers the control Apple wields over its App Store a benefit for consumers and app developers because it allows Apple to safeguard user privacy and streamline the relationship between app buyers and sellers.
Apple late last year halved its App Store commission to 15% for small businesses earning up to $1 million per year. The standard commission rate of 30% remains in place for apps with more than $1 million in proceeds.
“The argument in this case is not that Apple isn’t doing its job well,” Greengart said in an interview. “In fact, the argument is that Apple is doing its job too well and [Epic wants] alternatives that are cheaper.”
The trial comes at a time of heightened antitrust scrutiny for Apple and its tech peers. A U.S. House subcommittee late last year released a lengthy report questioning the market power Apple, Facebook Inc., Alphabet Inc.’s Google LLC and Amazon.com Inc. maintain over their respective markets. A recent Senate hearing focused on potential antitrust implications of Apple and Google’s dominance in the app store market.
Evercore ISI analyst Amit Daryanani said in an April 22 report that the end result of the case could have downstream effects for regulation as well, either by emboldening federal regulators to move more aggressively on antitrust action against Apple should Epic prevail, or causing regulators to think carefully as to whether additional actions would stand up in court, if Apple successfully defends its position.
Wedbush Securities analyst Daniel Ives noted that Apple has successfully defended its App Store policies several times in the past and predicted this time would be “no different.” Apple has a strong incentive to protect the policies that feed its lucrative app business.
“From an investor perspective, the key services business and its $65 billion+ annual revenue stream for FY21 remain what we estimate is a $1.3 trillion valuation alone for this business and key to future monetization efforts with more bundling efforts on the horizon,” Ives wrote in a May 2 report.
Epic has also sued Google for its Google Play app store policies. Google operates its app store as a proprietary payment system similar to Apple, but Google permits outside apps to be downloaded to Android devices and also allows third parties to run their own app marketplaces. Like Apple, Google removed Fortnite from its Google Play Store after Epic offered a discounted rate for customers to pay Epic directly.
Epic Games CEO Tim Sweeney and Apple CEO Tim Cook are among those scheduled to testify during the trial, over which U.S. District Judge Yvonne Gonzalez Rogers is presiding.