Epic Games and Apple Meet Fork in the Road

Epic Games and Apple Meet Fork in the Road

Epic Games has filed a lawsuit against Apple over its App Store policies. Alongside the lawsuit, the company released a video on YouTube and inside of Fortnite titled “Nineteen Eighty-Fortnite” where they call their users to action to “stop 2020 from becoming 1984.” Epic’s position has some similarities to the recent Facebook and Microsoft disputes with Apple’s App Store policies for developers.

It’s important to note that while Apple is often the target of game developers’ frustration over revenue sharing, Apple’s App Store take rate policies are essentially in-line with the other platform take rates. In other words, the topic of what is a fair take rate for platforms to charge game developers is an industry question, not an Apple question.

The dispute’s timeline

The dispute began after Epic Games announced its new payments platform and challenged Apple and Google in a statement that said:

“Currently, when using Apple and Google payment options, Apple and Google collect a 30% fee, and the up to 20% price drop does not apply. If Apple or Google lower their fees on payments in the future, Epic will pass along the savings to you.”

After hearing of the new Epic games payments platform, Apple removed Fortnite from the App Store. Apple then released a statement that said:

“Epic enabled a feature in its app which was not reviewed or approved by Apple, and they did so with the express intent of violating the App Store guidelines regarding in-app payments that apply to every developer who sells digital goods or services.”

As soon as Fortnite was removed from the App Store, Epic Games launched its campaign against Apple by filing a lawsuit and sharing the Nineteen Eighty-Fortnite video.

The case for Apple

The App Store guidelines allow Apple to collect 30% of the revenue generated from in-app purchases. Apple’s case is that the App Store is a for-profit platform and has a right to charge game developers for the cost of providing app discovery, distribution, payment processing, and content monitoring. These developer benefits are the backbone of what enables the App Store to be a trusted source of software and content for nearly 1.4 billion active iPhones, iPads, and Macs. Lowering or eliminating the fee would jeopardize the integrity of the App Store.

The case for Epic Games

Epic Games is essentially trying to make the argument that Apple and Google’s 30% fee is a burden that falls squarely on consumers. One of the hurdles of the anti-trust argument against the big tech companies is proving that consumers are worse off. Epic Games’ message is that the 30% take rate causes developers to pass on those costs to consumers.

Previously, Epic Games has made other attempts to dispute App Store policies. The company released its own PC Game Store, Epic Games Store (EGS), to compete with Steam. EGS offered developers an 88% share of revenue compared to the 70% that Steam was offering at the time.

Complicating the 30% take rate issue is the argument that Apple treats various applications unfairly. Starbucks, Amazon, and Uber are able to release applications with their own payment systems and avoid Apple’s fee. Netflix has an arrangement where users are directed to the Netflix website to subscribe. Apple has consistently held gaming companies to different standards. While there is leniency shown to other areas, gaming is not one of them. Recently, Apple blocked Microsoft’s upcoming cloud gaming service from being distributed in the App Store as it did not allow for games to be individually submitted for review. In response, Microsoft stated:

“Apple stands alone as the only general purpose platform to deny consumers from cloud gaming and game subscription services like Xbox Game Pass. And it consistently treats gaming apps differently, applying more lenient rules to non-gaming apps even when they include interactive content.”

Epic Games is calling for fair and transparent standards from Apple that allow developers to choose how they reach users and, ultimately, have those users pay for their products.

The verdict

Apple has been down this road before and prevailed. We suspect things will be similar this time. Apple stands on the higher legal ground with the right to charge game developers for the cost of providing app discovery, distribution, payment processing, and content monitoring. In the end, Epic Games needs Apple more than Apple needs Epic Games. We estimate about 25% of Fortnite’s 350m users are on iOS. Fortnite represents roughly $100M in revenue annually to Apple, about 0.03% of Apple’s overall revenue. Despite the game’s intense popularity, we think it’s unlikely that Fortnite players on iPhone and iPad will switch to an Android device to get their Fortnite fix.

The bigger question, will the US Congress eventually weigh-in and dictate the take rates platforms can charge developers? We think this is unlikely. If we’re wrong, we estimate that gaming represents roughly $2.5B in revenue to Apple. Apple’s overall App Store revenue is roughly $10B annually. This revenue wouldn’t disappear, but it may be reduced given the reduction in the take rate. It’s important to mention that many developers would continue to distribute through Apple’s platform. Those with the ability to build their own payments platform, like Epic Games, are rare.

Disclaimer

Apple, Gaming