Epic v. Apple: The Legal Battle and Its Impact on the Digital Economy
Dear Rich Lifer,
Since its creation in 2008, the Apple App store has been the only middleman between apps and iPhones and iPads. This means that any developer wanting their apps to be downloadable on Apple devices has to go through the Apple App Store.
Other platforms like Google’s Android allow for apps to be downloaded by third-party app stores.
Because of Apple’s powerful position, they are able to set basically whatever terms they want for app makers. This has put a spotlight on one issue in particular: Anytime you buy a digital product or service on an iOS App, it is processed on an Apple-run payment system, from which Apple collects a 30% fee.
This term has become the center of a huge trial that began this week, during which a federal judge is set to decide if Apple’s policy is a successful business model or a violation of U.S. antitrust law.
The judge will rule on whether Apple is justified in forcing App makers (and consumers) to use its payment technology.
This trial, which will have a lasting impact on the digital economy, stems from a lawsuit filed by Epic Games, the maker of the popular video game Fortnite, which had been removed from Apple platforms for not complying with its rules.
Today we will break down everything you need to know about the trial and what the outcome could mean for the future of how money is exchanged on smartphones.
The Basics of the Case
Epic Games, a $29 billion company based in Cary, N.C., brought Apple to federal court on Monday to begin a hotly anticipated trial over Apple’s control of a major piece of the mobile economy.
Epic is accusing Apple of running its App Store as an illegal monopoly because it only permits in-app purchases on iPhones to be processed by Apple’s own payment system, with a 30% commission added to most payments.
The fee has become known as “the apple tax,” and Epic says it is unfair and places an extra burden on smaller app developers, who face disadvantages trying to compete with Apple’s own apps that are excluded from the fee.
Some analysts believe the revenue stream from the commission has become more important to Apple in recent years since iPhone sales hit their peak years ago.
However, Apple states the 30% fee is necessary to safeguard the privacy and safety of the apps on Apple devices.
If Epic wins the trial, Apple will be forced to reshape the policies of its incredibly profitable app store, which has been the target of growing pressure from Washington and the European Union.
The outcome will have far-reaching consequences for companies in Silicon Valley and for the future of how money moves on smartphones and other devices. This ongoing court battle will be the most high-profile antitrust trial in the tech world in decades and also marks the biggest legal case against Apple in years.
Epic had to clear many procedural hurdles to get to this point, warranting a full trial in the opinion of Federal Judge Yvonne Gonzalez Rogers.
However, under U.S. law, plaintiffs traditionally have their work cut out for them in winning antitrust cases because courts have long interpreted the country’s century-old competition laws in ways that tend to favor big corporations.
In a pretrial decision, Judge Gonzales Rogers hinted at her skepticism regarding Epic’s argument that Apple is violating the Sherman Antitrust Act of 1890 by acting like an illegal monopoly.
The Sherman Antitrust Act outlawed trusts, defined as groups of businesses that collude or merge to form a monopoly to dictate pricing in a particular market.
Epic will have to prove not only that Apple is acting as a monopoly but also that it is abusing that monopoly power to hurt competitors and distort an entire market in its favor. And according to experts, this will be hard to corroborate.
Dan Ives, a tech analyst at Wedbush Securities, wrily commented, “Going up against Apple, it’s like trying to dunk over LeBron.”
Both sides have waived their right to a trial by jury, which means the trial will be a bench trial decided by Judge Gonzalez Rogers.
What Happened in Court?
As we mentioned, the court battle began Monday, so let’s review what we missed…
Lawyers for Epic made the case that Apple designed its App Store to give itself a leg up over other developers and said it is illegal for Apple to make itself the only payment system within the App Store.
Epic lawyer Katherine Forrest stated, “When they pick up their iPhones, users enter a different world. Each and every time they make an in-app purchase, a 30% tax is imposed.”
Apple lawyers responded by saying the 30% fee is not an abuse of power, rather, it allows Apple to provide a quality check and security standard on Apple’s operating system, iOS. Lawyers also argued that the 30% fee is an industry standard — not something Apple made up.
Apple lawyer Karen Dunn stated, “Epic demands that this court force Apple to allow in any and all third-party app stores so that they can distribute unreviewed and untested apps on all iOS devices.”
Epic CEO Tim Sweeny took the stand and testified for about three hours. He told the judge he had originally “loved” Apple’s mobile ecosystem but that it became too restrictive and expensive to maintain.
Sweeney estimated Apple made more money from some apps than the developers who created them because of the 30% commission.
However, Sweeny maintained that the goal of the trial was to convince the judge to force Apple to change its behavior in the iPhone App marketplace, not secure monetary damages.
Apple lawyer Richard Doren questioned Sweeny about his decision to violate Apple’s terms of service by allowing Fortnite players to pay for the game’s currency using Epic’s own payment processing system at a rate lower than Apple’s.
Sweeny responded by explaining he knew his actions might result in Fortnite being removed from the App Store (which it did) but that he ultimately hoped it would make Apple “seriously reconsider its policy” (which it didn’t).
Sweeny commented, “Our goal was to demonstrate to smartphone owners that removing the platform fees would result in savings for them.”
The trial will continue for three weeks, and Apple CEO Tim Cook is set to testify, although his day in court is not currently known.
Economists will also be called by both sides to give testimony regarding the market issues surrounding the case.
To a Richer Life,
The Rich Life Roadmap Team