16/09/2021   Piers Harding-Rolls, Louise Shorthouse
Epic Games vs. Apple: What the ruling means for developers and consumers

Following a lengthy and revealing antitrust case between Apple and Epic Games, a Californian judge has determined that the App Store is not a monopoly, and has ruled in favour of Apple on nine of the ten counts contained within the lawsuit. Epic must pay Apple damages for breaking its contract with the company when it updated Fortnite to include a button to enable third-party payment outside of Apple’s in-app purchase (IAP) mechanism.

However, the judge also found that Apple was engaging in anti-competitive behaviour with its anti-steering rules which prohibit game developers from making app customers aware of other forms of payment outside of Apple’s own IAP and allowing gamers to follow links from within apps to third-party payment options. This ruling means that within 90 days the iPhone maker must allow developers to point consumers towards external payment systems going forward. The judgement has been made in the context of California’s competition law but is likely to be implemented across the US if unchallenged and could also be applied globally considering the backdrop of antitrust activity surrounding Apple and other big tech companies. Epic has already appealed the judgement, while Apple is mulling its response.

While, on the face of it, a change like this could disrupt Apple’s service revenue quite significantly, it is as yet unclear how this ruling will be interpreted in practical terms especially around the linking and access to external payment mechanisms within apps. There are also mitigating factors which Ampere believes will lessen the commercial impact of the ruling to both Apple and developers if applied to its fullest extent.     

Apple still able to claim commission on external payments for use of its platform, but 30% seems unlikely 

Although users may now be routed away from Apple’s IAP system, as stated in the ruling this does not prevent the company from being entitled to claim some form of commission for the use of Apple IP as part of this monetisation. Whether this commission will be easy to collect remains to be seen. As such, it is unlikely that developers will be able to benefit from Apple’s intellectual property without charge, regardless of the payment systems in place. Any commission levied will of course eat into the improved revenue share developers would be able to derive from avoiding Apple’s 30% IAP platform charge.  

There is no indication of how high this commission could be. However, if Apple sought to enforce a 30% revenue share of external payments, the backlash would be considerable and may lead to further legal action. A cut of around 3-5% seems more realistic, as it is unlikely that Apple will allow third-party payment processes to take place commission-free.     

It is also possible that Apple will gauge the impact of the injunction before enforcing any rules around this. It has numerous on-going lawsuits globally, and any action may impact proceedings in these cases, resulting in broader commercial implications for Apple. If a lot of money is funnelled away from the App Store, though, Apple is within its rights to ensure compliance with its commissions.

 Big developers to benefit more from the ruling

The opportunity to direct consumers to alternative payment mechanisms will be welcomed, particularly as developers may be able to circumvent Apple’s 30% commission and instead give a smaller cut to both Apple and an external payment provider. However, the new ruling will favour companies with existing user account systems, and payment and billing processes in place, enabling a more seamless transition to external payments.

For smaller developers, working to support multiple payment options and raise awareness of them, plus creating a user account system where one does not already exist, may prove too taxing and simply not worth the end result. After all, directing gamers out of an app and over numerous hurdles (logging in, filling in relevant information) may be difficult when the alternative is the familiar and seamless iOS IAP process.

For dedicated users of big brand games, an external payment solution may be worth the initial effort. However, for many indie titles and (hyper)casual games with fewer long-term users and brand loyalists, the friction may prove too great to wring out any meaningful engagement with a third-party payment system. As a result, the smaller developers for whom an increased revenue share would have a measurable impact will benefit the least, whereas large companies will simply be adding to multiple existing revenue streams – and probably not in any significant way.

Due to the increased friction, external payment options will need to be incentivised in order to gain any sizable traction: for example, 15% off in-game items when choosing an alternative to IAP. Again, alongside a likely ongoing commission to Apple, this further reduces the revenue share benefit of avoiding IAP as a payment mechanism.

How might Apple try to mitigate the effects?

The wording of the injunction is vague enough that Apple may seek to enact a series of counter-measures in an attempt to limit its impact. For example, a rule on price parity for App Store developers could prevent alternative payment options being offered with lower prices, and potentially funnelling a larger amount of transactions away from Apple where it can easily seize its commission.

Apple will likely create new guidelines regarding where and how links to external payment systems can be established – it cannot disallow this anymore, but it can certainly seek to shape the consumer experience in a way that renders the third-party options less appealing and more burdensome.

Another outcome of this ruling could be for Apple to reduce its IAP charges from 30% in more cases. Pressure on this highly profitable share is being applied across a wide range of legal actions, with Apple having already made some concessions to smaller game developers. A move like this would reduce Apple’s service revenues quite significantly but would undermine the adoption of third-party payments and keep most payments within the Apple ecosystem.    

Disappointment for consumers as Epic states Fortnite will not return to the App Store (yet)

Tim Sweeney has stated that Fortnite will return to the iOS App Store when Apple “can offer in-app payment in fair competition with Apple in-app payment” – essentially, when Apple allows IAP options comparable to its own. Redirection to external payment mechanisms is not enough for Epic. This will be a blow for many fans of the game who prioritise play on iPhone or iPad. In fact, figures brought to light during the court case revealed that almost two-thirds of Fortnite players on iOS play the game on Apple devices exclusively.

What implications does the ruling have for Google?

Back in 2020, Epic Games filed a similar antitrust lawsuit against Google, but this has yet to go to trial. As with Apple, Google currently does not allow developers to redirect consumers to external payment methods. Whilst it is positive for Google that Apple won on many counts – including not being a monopoly – it will almost certainly face pressure to conform to similar rules around payments.

However, in significant contrast to Apple, Google does currently allow third-party app stores to operate on Android. These existing freedoms may make Google less susceptible to the same fate. What’s more, the Google Play Store generates a relatively modest share of Alphabet’s overall revenues, with the bulk of its income driven through advertising and supported by other products such as Google Search and YouTube. If Google is also forced to allow links to external payment mechanisms, some of the revenue developers may recoup will probably be spent on advertising, and will therefore stay within Google’s ecosystem. Ultimately, Google is better-positioned to either avoid or weather a similar ruling.

The relationship between platform holders and content creators is ripe for disruption

The 30% commission taken by Apple and Google is the industry standard, but is under increasing pressure. Epic Games has spearheaded a campaign to create what it labels a fairer environment for developers, calling for platform holders to reduce their revenue cuts and on mobile devices, allow greater freedoms in terms of content distribution. It has created its own PC games store, from which it takes a 12% share (versus market leader Steam’s 30%), and an Epic Games Store for Android is on the roadmap. It is worth noting that Epic Games Store is unlikely to be profitable for the foreseeable future.  

Bolstered by Epic’s vocal approach to industry change, many developers and regulatory bodies are now questioning the 30% cut taken by companies like Apple, and the insular ways in which they operate their platforms. Under pressure from Japan’s Trade Commission, Apple recently conceded to allow developers of ‘reader’ apps to point users to their own websites for account management. In South Korea, a new law will force Apple and Google to allow developers to use their own third-party payment systems.

Details of the ruling must be defined by the companies involved

Though on the surface, the injunction appears to be a win for developers, much is still unknown about its actual implementation. Apple must decide whether to take commission from transactions which take place outside the App Store, and if it does, how much, and through what means? The friction involved in the user journey when being routed to an external payment system means that few will leave IAPs behind, and incentives on such purchases will make a dent in any newly recouped developer revenue.

Significantly, Ampere does not see this as a win for the consumer. Aside from the negative aspects of the complexity of the purchase journey and a potential lack of payment security, a better share for developers will not reduce prices for consumers. Even if purchases are incentivised to drive traffic through third-party payment mechanisms, it is likely that developers will tweak monetisation so that any fall in revenue is mitigated for in other ways.

 

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