By Brian Fung and Shannon Liao, CNN Business
Updated: Fri, 25 Sep 2020 13:48:39 GMT
Source: CNN Business
Apple and Epic Games — maker of the hugely popular video game Fortnite — are set to clash in court Monday over the iPhone maker's app store.
At first glance, Monday's fight may not seem so, well, epic. The two companies are expected to debate a proposed court order that could temporarily force Apple to bring Fortnite back to the iOS App Store. Apple removed the game last month for violating its policies after Epic introduced a way for users to circumvent Apple's in-app payment system.
But Monday's arguments reach far beyond these two tech giants. They reflect years of complaints by app developers around the globe who say Apple's tight-fisted grip on iOS app distribution chokes off innovation, and results in unreasonably high costs to consumers.
Apple and Epic did not immediately respond to requests for comment.
The hearing lays the groundwork for what experts say will be a landmark antitrust case against Apple — one that could threaten the profits of the world's most valuable company and reshape the entire digital economy.
As part of its effort to challenge the status quo, Epic has also sued Google, which pulled Fortnite from its app store in August for similar reasons as Apple.
"This case is not just about one video game, but about whether just two companies — Apple and Google — can control the terms of how software is distributed to millions of users," said John Bergmayer, an attorney at the consumer advocacy group Public Knowledge.
Here's what you need to know about the showdown.
Why are Apple and Epic in court?
It all comes down to the way Apple gets paid.
When you make in-app purchases from an iOS app, Apple takes a 30% cut, which Apple says is justified by the service it provides. Apple's contracts prohibit trying to circumvent the rules.
Last month, Epic decided to challenge the rule. In a software update to Fortnite, it encouraged iOS players to buy the game's digital currency, known as V-Bucks, directly from Epic, as opposed to through Apple's in-app purchase system. To sweeten the deal, Epic offered a discount to those who bought V-Bucks directly.
While consumers may have viewed it as a loyalty bonus, Apple saw it as a gross violation of its contract with Epic and an attempt to undercut a key revenue stream.
In a letter to Epic, Apple lawyer Douglas Vetter wrote that Epic wants "all the benefits Apple and the App Store provide without having to pay a penny." He added: "Apple cannot bow to that unreasonable demand."
Apple promptly yanked Fortnite from the App Store and, for good measure, revoked access to Unreal Engine — a piece of Epic software used by game developers and, increasingly, Hollywood, to create lifelike digital scenes and environments. The technology has been used in Disney's recent award-winning series The Mandalorian.
That brings us to Monday's arguments. Epic has called for a preliminary injunction that would prevent Apple from taking actions against Epic. Apple is against the proposed injunction, saying Epic wouldn't be in this sticky situation if it hadn't willfully broken its contract — a fact Epic doesn't deny. (The judge in the case has already granted a temporary restraining order against Apple that forces the company to restore Unreal Engine, but Fortnite remains banned.)
Why did Epic break the rules?
Epic CEO Tim Sweeney has made clear he thinks Apple is running a monopoly and that a 30% revenue share is far too steep.
The Epic and Apple battle began on June 30 when Sweeney penned an email to Apple's Tim Cook, Phil Schiller and Craig Federighi making demands.
Sweeney proposed a way to accept payments from users outside of Apple's in-app purchases, and for Epic to launch a competing app store inside of Apple's app store.
It set off a firestorm. Sweeney's email was met in response by Apple's legal counsel, which called it "disappointing" and declined both requests. Sweeney retorted that the legal reply was a "self-righteous and self-serving screed" and said he would continue to address this "injustice" in the industry "for so long as it takes to bring about change, if necessary for many years."
He informed Apple that Epic would launch direct payments, breaking the tech giant's app store policies. He was ready for a fight. On the same day, Epic also released a parody video of Apple's iconic "1984" Super Bowl ad, casting Apple in the role of villain.
Why is this case a big deal?
This isn't just a battle between Apple and Epic, or even a fight over app store royalties. The entire foundation of the app economy is at stake.
Epic isn't simply asking a court to block Apple's banning of Fortnite. It's alleging that Apple holds an unlawful and anti-competitive monopoly that strangles innovation in the market for iOS app sales and actively harms consumers.
A final ruling against Apple someday could potentially reshape how all app stores function in the United States. And it could undercut Apple's decades-long strategy of creating a tightly controlled technology ecosystem, or walled garden, that prevents iPhones from installing apps from outside the iOS App Store.
Epic isn't the only company to tussle with Apple. Basecamp, the project management software company, testified before House lawmakers this year about Apple's fee structure, and its rules.
"The rules are often interpreted differently by different reviewers, because they're intentionally left vague," said David Heinemeier Hansson, Basecamp's founder. "So we live in constant fear we may have violated these vague rules, and that the next update to our applications will be blocked by Apple."
Hansson has emerged as one of Apple's most vocal antagonists. A few months later, he had another run-in with Apple when he launched Hey.com, an email app, that was blocked from the iOS App Store.
The lawsuit against Apple also comes amid broader antitrust scrutiny of the company and its peers, including Amazon, Facebook and Google. Apple's app store policies are also under investigation by European competition enforcers.
The case reflects the culmination of a revolt by app developers that began in 2016. At the time, Spotify said it would no longer support in-app subscription payments on iOS, pointing customers to pay their subscription fees through its own website. (Spotify has complained to EU regulators of subsequent retaliation by Apple.) Then, last year, Netflix followed suit.
Spotify, Basecamp, and a host of other Apple critics have since joined forces in the Coalition for App Fairness, an advocacy organization devoted to calling out Apple for "carefully crafted anti-competitive policies."
But Epic may be the biggest corporate critic yet to face Apple in US federal court, making this case the most consequential of its kind — though another similar case, brought by iPhone users, Apple v. Pepper, is moving along a parallel track.
What does Apple say?
Apple has defended its app store policies as an important mechanism for keeping its users safe and secure from malicious software. It's argued that the fees it charges simply reflect the enormous value Apple provides as the operator of one of the world's biggest (and safest) app stores.
"The App Store is the world's most trusted marketplace for apps precisely because of the standards and safeguards put in place—and the mechanisms Apple has developed to enforce them," Apple argued in a court filing.
In a competition case like this one, experts say, much of the litigation will hinge on what market Apple is allegedly dominating. So it's in Apple's best interest to define the market as broadly as possible. If it successfully persuades a judge to view the relevant market as "all smartphones," that makes its defense that it is not a monopoly far easier: Apple only claims a 13.3% share of the global phone market, which is far from a majority. (Epic's strategy is to define the market as narrowly as possible: Apple, it says, controls 100% of the market for iOS app stores.)
Apple can also argue that the 30% fee is payment for running the App Store, giving apps like Fortnite an easy way to reach consumers, and that its app review process helps protect consumers from security risks.
Jeffrey Blumenfeld, a partner at Lowenstein Sandler said he had "a very hard time believing" that the court would decide in Epic's favor and say that "Apple is not permitted to control distribution of apps through its own App Store." For the court to do that, it would have to be "pretty strongly convinced" that consumers would be better off in the long run, he said.
Monday's arguments could determine whether Judge Yvonne Gonzalez Rogers orders Apple to restore Fortnite to the iOS App Store while the suit continues. It could also determine whether Apple may take other actions against Epic amid the ongoing litigation. A final resolution to the case could take years.
Gonzalez Rogers has expressed sympathy for Epic's arguments, if not its tactics. Though she accused Epic of coming to the case without "clean hands," Gonzalez Rogers recently challenged Apple to explain why it does not hold a monopoly.
"The problem is, if you have an iPhone, you can't buy [apps] from anyone else," she said. "You can't. You are limited to buying it from Apple. I can't buy it from Google. I can't buy it from Amazon. There is no competition. And so the question is, without competition, where does that 30% come from — why isn't it 10%, 15%, 20%?"
Apple replied that consumers enjoy plenty of choice when they are selecting a smartphone platform — iOS or Android.
Both ecosystems could be powerfully affected by the final decision in the case, said Bergmayer.
"This has broad implications for commerce, for culture, and for individual free expression," he said. "The modern digital economy was built on the internet, an open platform where no one company can totally shut anyone out."