Why Epic Sued Apple
Epic Games is the most important technology company that no one’s heard of.
The 25-year-old, North Carolina-based company makes video games and the physics engine that underpins an enormous amount of digital media.
You’ve probably heard of Fortnite. Epic Games makes it.
If you’re under 25 you’ve probably played it.
Epic has been busy over the past few weeks.
They publicly announced a pricing change for Vbucks, the in-game currency Fortnite players use to buy accessories and outfits for their characters.
If players buy their Vbucks in Epic’s web store, they’ll save 20% over buying them within the Fortnite app in the Apple App Store or Google Play Store.
Why would they do this?
Because Apple charges a 30% fee on all transactions processed on the iOS platform.
Apple has made this a larger priority over the years as the app ecosystem has grown and the company has pivoted its narrative from a hardware producer, to a focus on services revenue to supplement their business.
Services revenue is usually recurring and more predictable. It’s one of the main reasons Amazon has a significantly higher valuation than Walmart, despite Walmart having about double the total revenue. Amazon has 112 million Prime subscribers, while Walmart+ was only introduced this year.
To ensure the growth of its “services” revenue, Apple wants to show more fees collected from apps and subscriptions to go along with its high-margin sales of devices. Apple made nearly $15 billion in sales from the App Store last year (about 5% of its total sales).
Unfortunately, taking a relatively high rake on all activity in their ecosystem comes with consequences.
The 30% fee is particularly burdensome on smaller technology companies that are trying to break into the market. When the bar for survival is raised by a large fee, fewer survive.
This frustrates Tim Sweeney, the CEO, and founder of Epic Games.
It frustrates him so much that he decided to take the risky move to challenge Apple’s policy of banning apps that skip App Store fees by encouraging users to pay in a web-based store.
When Apple decided to remove the Fortnite app from its store in response to Epic’s price change, he immediately upped the ante.
First, Epic filed a suit against Apple in California for anticompetitive behavior.
Then, they launched a PR campaign pointing to the hypocrisy between Apple’s past and present by parodying Apple’s iconic 1984 commercial against IBM. (it’s only 1 minute, go watch it).
Their shot for shot remake casts Apple in the role of the unimaginative monolith, with Epic as the plucky upstart.
Cute. What's the big deal though?
Apple and Antitrust
The timing of this is intentional. Tim Cook (along with the CEOs of Facebook, Amazon, and Google) were just summoned in front of Congress as part of an investigation into antitrust concerns for the nation’s largest tech companies.
While the questions for Jeff Bezos and Sundar Pichai were significantly more pointed than those directed at Tim Cook, the Apple CEO’s presence signifies Congress hears the concerns that have been voiced by developers about the Cupertino company.
With antitrust on the minds of tech journalists, legislators, and the public, Epic made the expression of Apple’s monopolistic control over the App Store tangible.
The Case for Epic Games
It’s always easier to root for the little guy. In this case, the little guy is a 25-year-old company that just raised $1.78 billion at a valuation over $17 billion.
That means they will have enough resources to take this case the distance and get something resembling a fair deal.
More importantly, Epic likely could have cut a privileged deal with Apple for a lower app store tax (as Amazon and others have done according to Bloomberg).
Instead, it chose this public position from the principled position of standing up against an unfair environment, as one of the only game developers with the capacity to go to battle with Apple.
Why do battle?
One must look no further than Epic’s Unreal Engine. The physics engine underpinning Fortnite has been in development for more than two decades.
In addition to being used by other video game developers, the Unreal Engine is also used in film making. The virtual sets of both HBO’s Westworld and Disney’s The Mandalorian were rendered using their technology.
More creative firms using their technology has a triumvirate of benefits.
When another hit game is built with Unreal Engine, they receive a royalty on its use. Similar to cloud providers like AWS and Microsoft Azure, they benefit from the expansion of the total market.
More developers gaining experience with Unreal serves to further entrench it as the norm for development in future projects.
Like a B2B Saas company, Epic can create a better product for its clients by pushing updates to everyone and identifying areas of improvement from crowdsourcing across their vast array of use cases.
Their case is that Apple’s extractive tax on development in the iOS ecosystem stands directly in contrast to the enabling efforts of firms like Epic.
In May of 2020, Epic announced that they’d forgo royalties for games developed with Unreal Engine until developers have earned their first $1 million in revenue.
Epic has walked the walk in reducing costs for other firms, and therefore, consumers. Apple cannot claim the same.
The Case for Apple
Lots of people will already have their minds made up. Apple is the big bad behemoth squashing small companies in pursuit of their own growth.
However, there is a basic case that Apple can make to justify its fees and a larger philosophical framework for allowing the current arrangement to persist.
The 30% fee is a relic of the early days of the iTunes store, where Apple collected a 30% on music, and later movies & tv shows sold on their platform. This unlocked an enormous amount of value to sell media inventory while Apple barely made any margin above credit card processing fees.
Apple’s job was to ensure a proper file was downloaded. You didn’t want to buy a single by Akon and get a Backstreet Boys song. Apple’s brand verified each purchase.
The same trust was imbued on the apps in the App Store. By receiving approval from Apple and being listed for sale (or free) an app received the Apple co-sign that it did not harbor malware that would wreck the performance of your device.
It’s easy to forget how common both of these things were in the wild west of the early 00s internet.
The safety of the iOS ecosystem and the relative ease of use they create for iPhone customers created enormous value. Their fees reflect their cut of the action, which pales in comparison to the enterprise value that was created.
The success of Uber, Doordash, Instagram, and Candy Crush are all intimately tied to the App Store platform.
Further, look at who else is vocally against the App Store rake. Facebook, Microsoft, Spotify, and Netflix have all complained about the fees. Are these the ‘small companies’ that antitrust action is aimed at assisting?
Outcomes
If you read to the end hoping for me to reveal my view, I’m afraid you’re going to be disappointed.
The name of this email is ‘Expand Your Mind’ because the objective is to expose our minds to differing perspectives.
My singular guess is that there is no world in which only one big US tech company is broken up by an antitrust ruling. Once the Overton Window shifts and a tech company is broken up, it will be harder to stop it from occurring a 2nd or 3rd time.
Right now, I think the case is strongest for Google to be broken up and weakest for Facebook.
Is this a smart play by Epic? Yes. Lots of game developers will use Unreal Engine out of a sense of loyalty to a company that stands up for the entire industry.
Does the Apple platform unlock enormous amounts of value for both users and app developers? Yes. They’re one of the most valuable companies on earth because they’ve managed to develop the most compelling luxury product in the history of humanity.
A court ruling will likely come down to the minutiae of antitrust law interpretation and the conflict between different schools of thought about competition.