Editor’s Note: WRAL TechWire enlisted a number of thought leaders for the Triangle region discuss the possible implications Epic Games’ lawsuit against Apple and the fight over the mandatory fees imposed by Apple’s app store. Lawyer who focuses on veteran technology Jim Verdonik is one of the founders Capital Law Innovations.
RALEIGH – I have represented computer technology and gaming companies for decades. So, like most people in the industry, I am watching closely as the courts decide the fate of thousands of app developers and tens of millions of consumers worldwide.
The next round of that battle will be played this week in the US District Court for the Northern District of California in this case Epic Games vs Apple, Inc. Epic Games has a similar lawsuit against Google as well, but I will focus on Apple’s lawsuit.
From its early days as a pioneering pioneer ending the monopoly of Microsoft and IBM, Apple Inc. has transformed itself into a worldwide money maker with its own monopoly price setting terms and conditions for thousands of app developers worldwide who want access to millions of high-end customers using apple devices and software.
If you are a consumer who owns Apple devices, in addition to paying more for the devices you use, Apple Inc. own you, because you are locked into Apple’s proprietary iOS operating system that runs all Apple mobile devices. Because Apple owns the only door lock for the operating system, Apple sells access to you and all other Apple device owners to thousands of application developers around the world.
All that Apple is asking to open its doors is 30% of the revenue app developers generate from sales to Apple customers. Google charges the same fee of 30% for applications downloaded to devices running its Android operating system.
Why did App developers choose to give up 30% of their revenue? Because Apple and Google designed their product so that the application can be downloaded to their device only if the application is downloaded through their respective App Store.
That’s a lot of money that app developers give for sales made through Apple’s app store. But it’s worse. Maybe the developer wants to sell some product through the Apple app store to make an initial sale to Apple customers. But Apple also requires developers to pay Apple for so-called “in-app” sales of products that the developer doesn’t want to sell through its app store. For example, upgrades and access to certain tools and features that make computer games more fun. Apple claims that the requirement for selling via its app store is to minimize security concerns. Maybe that’s fair. Maybe the consumer wants that security. But has anyone ever asked you as a consumer if you would like to pay for that security? I don’t think so. Those are the rules that Apple enforces without asking consumers or developers.
On August 13, 2020 Epic Games updated its Fortnite product to lower the price of V-Bucks consumers use to purchase in-app upgrades by 20% if the consumer buys V-Bucks directly from Epic, not from Apple or Google. Both Apple and Google responded immediately by removing Fortnite from their app stores.
Apple also removed another unrelated Epic product called Unreal Engines, the software engine used by many game and movie companies to develop entertainment from its app store to punish Fortnite.
Epic Games then sued Apple and Google for antitrust violations.
Is Epic Games alone? Yes and no. Epic is one of the few companies willing to spend money in court against giants Apple and Google, but there is widespread support for Epic in the app community. The Coalition for App Justice (www.Appfairness.org) describes complaints or many developers against the blackmail of the App Store.
So why should you care about this if you are not an app developer?
Let’s analyze Apple by listing its largest component parts
- The device makers are located mainly in China
- Software developers located mainly in the US
- Worldwide distributor of applications and software
- Entertainment companies around the world
From an Epic Games perspective, the market price for services provided by Apple’s app store would justify a commission of under 10% for products sold, if Apple’s app store had not colluded with Apple’s devices and software business to prohibit developers from selling outside of Apple’s apps. store. Apple’s position is that 30% is a fair price for its app store services.
Apple makes a lot of money diverting revenue from app developers. As a result, Apple has benefited from other business jobs. Going back to the start of antitrust laws more than a century ago, Standard Oil was able to force the railroads to agree to pay Standard Oil a discount on the money Standard Oil’s competitors paid to the railroad for delivering oil. It’s a pretty neat business – making a profit whenever a competitor incurs costs without providing any service.
How does Standard Oil compel railroad companies to pay rebates on competitor shipments? Standard Oil has threatened to stop doing business with railroads. Since Standard Oil was by far the largest volume shipper, the railroad companies agreed to pay a discount to avoid losing their large customer. Standard Oil argues that they have the right to terminate business with railroads that do not provide discounted prices.
Do Standard Oil’s rebate terms sound like operating an app store and then banning a business that doesn’t agree to sell all of their products through your app store?
Antitrust laws focus on protecting consumers from monopoly prices. Often times showing a loss to your business isn’t enough to prove an antitrust offense. Oil companies that compete with Standard Oil have to raise their prices to cover the cost of the rebate. That allows standard oil to increase its price. That is what is detrimental to consumers.
So Epic started trying to prove his point that Apple was overcharging consumers by starting to sell in-app products to consumers through Epic’s own app store at a 20% discount off the price Apple was charging. Apple didn’t like price competition so decided on Fortnite.
Epic wants to show that consumers are suffering from collusion between various parts of Apple. Apple believes that it is in absolute discretion to stop selling any competitor’s product at any time.
I’m no antitrust expert, but most experts think Epic has an uphill battle when it comes to Apple’s ability to remove Fortnite and other computer games from its app store. Experts are more divided about whether Apple can also ban distribution of upgrades to Unreal Machines to punish Epic for price competition on its Fortnite products. Since many other computer games and other businesses rely on the Unreal Engine, they will be undermined by Apple’s actions. That brought more allies into the anti-Apple alliance.
Wider Tools and Fixes
So, if the antitrust laws don’t provide consumer protection against Apple’s predatory pricing, are there other tools? I think there is.
Will consumers stop buying Apple products? In the end, this is the most powerful weapon. Apple gained the monopoly by convincing software and application developers to develop products that consumers could use on the Apple platform. Your smartphone would be much dumber if a coalition of developers used another platform instead. That’s why it’s important that the developers come together to fight Apple and Google. If they can convince consumers that they are losing valuable products owned by Apple and Google, consumers can rebel and open the door to sellers of other devices with more open operating systems.
Consumer Law Suit
In Apple vs Pepper, consumers have sued Apple over Apple-related issues setting prices for apps. The US Supreme Court ruled in May 2019 that the class action lawsuit could proceed after Apple decided to drop the lawsuit. Will hundreds of other consumer lawsuits follow? Will law firms continue to file class action suits on behalf of consumers?
Consumer Protection Statute
When you buy an iPhone, does Apple tell you that Apple will own you and use that ownership to make you pay more for all the apps over the life of your phone? I don’t think so. Perhaps the state will ask Apple to clearly explain its ownership of consumers and the economic consequences each time someone buys an Apple product
State Unfair Trade Practices Act
Most states have unfair trade practices laws that go beyond Federal antitrust laws to regulate toxic business practices intended to harm other businesses. These laws often impose triple compensation for violations. Will judges interpret these laws to cover Apple’s practices? If the judge doesn’t want to, will the state legislature change the law to cover tax practices by Apple, Google and other members of the BIG TECH club?
The European Union has been aggressive in countering Apple and other policies that hurt European businesses.
The Biggest Threat to Apple
I’ve noticed that Apple has a long history of aggressive legal action – particularly in patent litigation. Google, on the other hand, has taken a less aggressive approach in defending against Epic Games. Google may be trying to reach a settlement with Epic. Of course, Google is a more diversified company than Apple and has less of a downside in compromising with developers over app store access and pricing issues.
The business alliance between Google and the broad coalition of big app developers may be what brings Apple to its knees.
Stay tuned for further developments in the upcoming story about the world battling BIG TECH’s monopolistic practices.
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