Lawful Neutral: The Epic vs. Apple lawsuit – when titans are tweens

why does this continue

The MassivelyOP Golden Yacht was anchored someplace off the coast of Maine when the first news about Epic suing Apple hit. We had sailed north to avoid the hurricane from our normal anchorage much further south. I burst into the galley, fax bulletin clutched in my hand, and delivered the news to a bemused Bree, slowly sipping her tea and staring at me with a raised eyebrow.

“This,” I said, “this is going to make for an awesome Lawful Neutral.” Two months later, low and behold we have two companies acting like they in a schoolyard fight with enough drama to catch even Jerry Springer’s attention. With snark and sniping the likes of which we’ve seldom seen between two billion dollar companies, the Epic v. Apple fight is shaping up to be one tumultuous, and facepalm-worthy event.

Before I dive into this rat’s nest, let me make one thing abundantly clear: There are no good guys in this fight. Whether its child labor or installing tracking software of debatable origin, Apple would enslave us (more?) if it could and Epic would install eye trackers to ensure we are looking only at the things it wants us to. Neither of these companies represents the “good guys,” and I think we would hardpressed to even declare one of them the lesser of two evils. They are equally awful, just in unique ways.

But that doesn’t mean the outcome of this lawsuit doesn’t potentially benefit us. Right now, Epic’s greed aligns with gamers’ interests overall. But don’t mistake that temporary alignment for any other than that: temporary. Epic Games is not your friend and isn’t moving with your interests at heart. We good? Cool, moving on.

What’s the Issue?

What started this whole malarkey was Epic Games putting an alternative payment method into Fortnite on the AppStore after asking Apple to allow it to put in its own competing payment option. Apple was, as expected, less than receptive the request and gave what I consider to be a rather bullcrapp-y response about how denying customer choice is actually a good thing.

From there, Epic did the Thing anyway and included its own payment option in Fortnite. Apple got feisty and threatened Epic if it didn’t remove the option because (they argued) it violated the developer agreement. Epic Games, expecting this eventuality, replied with a pre-planned antitrust and monopoly lawsuit.

The software industry is watching with something akin to trepidation over the proceedings. The outcome of this case could have dramatic, far-reaching effects on everything from iOS to the PlayStation store and any other number of similar situations and platforms. The “AppStore” model is incredibly lucrative, and we’ve seen moves from every major player in the space to follow Apple’s lead. But now, the very thing that made the AppStore so successful might actually be its downfall.

The lawsuit

The lawsuit alleges 10 counts that try to establish Apple as in violation of antitrust laws through the Sherman Act and the California Cartwright act. There are two main areas of Apple and iOS that these counts target: the “market” itself (the iOS platform) and the management tie-in to the payment processor.

Counts one through three deal with the iOS AppStore as a market. The first count alleges that Apple has monopoly control over this market and is engaging in anti-competitive behavior through technical and contractual limitations.

Count two alleges that Apple has monopoly over the “essential facilities” of iOS by preventing competing AppStores from being used on iOS. Count three deals with the contractual mandates that Apple imposes on app developers to ensure their continued monopoly.

Counts four through six apply the same basic logic to the Apple payment processing. Counts seven through ten are essentially the same, just in a California jurisdiction.


The crux of the lawsuit

The funny thing here is that Apple and the AppStore do appear to meet all of the requirements to be a monopoly. They have a stranglehold over all of iOS and are making moves to start the same type of model over their desktops and laptops. They hold complete market power in the iOS market, and that aforementioned stranglehold is anti-competitive to its core.

What Epic has to prove is that iOS is a “valid antitrust market.” This gets a bit dicey because current antitrust law isn’t especially well-equipped to handle this kind of situation. Historically, courts have used a two-step approach: the Brown Shoe factors apply to demand substitution, or the “extent to which an an increase in one product’s price would cause consumers to buy another product instead,” and the SSNIP test. The Brown Shoe factors are a list of “practical indicia” to assess whether goods and services are a reasonable substitution in the definition of a market or a submarket. The Brown Shoe factors are:

1. industry or public recognition of separate markets;
2. a product’s peculiar characteristics and uses;
3. unique production facilities;
4. distinct customers;
5. distinct prices;
6. sensitivity to price changes; and
7. specialized vendors.

The goal of the Brown Shoe factors is to help define the market or submarkets. There’s a lot in the Brown Shoe v. United States, but salient points here are that defendants, in this case Apple, typically argue for bigger markets to show more competition, while plaintiffs argue for smaller markets to show less.

Once the market has been established, the courts then apply the SSNIP Test, which stands for “Small but Significant non-Transitory Increase in Price.” The test asks if a hypothetical monopoly could raise prices by 5% and have the consumers move to a competing product, thus making the price hike unprofitable. If a customer can’t reasonably switch in the event of a 5% price hike, the company is likely to have monopoly power in the market.

There’s a particular effective example of this in play as explained by the nonpartisan Congressional Research Service in a prepared whitepaper for the U.S. Congress:

“One popular antitrust treatise illustrates the SSNIP test’s application by comparing proposed markets consisting of Ford passenger cars and all passenger cars. Because Ford—which has a “monopoly” over the sale of Ford passenger cars—would likely be unable to profitably raise its prices by 5% because of the business it would lose to other car companies, Ford passenger cars are unlikely to qualify as a properly defined antitrust market. However, because a hypothetical firm with a monopoly over passenger cars likely could profit from such a price increase, passenger cars likely qualify as a distinct antitrust market.”)

What’s happened

Well, if you imagine any sort of middle-school fight between tweens, that’s about where we are. We have the two kids (Apple and Epic) screeching more and more shrilly about who should be in trouble to the teacher, while another kid who wants to be part of the situation but isn’t chimes in with completely useless information (Microsoft), and the fourth kid is trying to quietly slide away and not also get in trouble (Google).

In non-metaphor form (and substantially more wordy), Epic released an update with its own payment processor included alongside Apple’s payment processor. Apple got upset and started threatening Epic for breach of contract, and Epic retaliated with a lawsuit and incredibly snarky video parody of an Apple commercial from the ’80s. Because of course it did.

Apple stopped updates of Fortnite from iOS, then threatened to cut off Epic’s access to iOS and Mac entirely, which would have had the downstream impact of blocking any other developer that used the Unreal engine. This was clearly just Apple trying to show how big and tough it was and to call Epic’s bluff. So Epic filed a motion to stop the blocking.

The mobile game developer community basically lost its collective shit, and then Microsoft chimed in because of course it wanted to capitalize on the mob-rage and win some brownie points with consumers by siding with Epic, thereby attempting to prove it was relevant to the conversation (Narrator: It was not).

The judge next granted the motion against blocking the Unreal engine, meaning that Apple couldn’t kick every game using the Unreal engine off of the AppStore, but she upheld the blocking of Epic-created games. True to its word, Apple blocked future updates for Epic-made games on iOS and Mac and in a fit of extreme petulance, featuring PUBG on the AppStore the day it did it. This is how mature adults act, right? Sure, Epic started the snark-war, but really Apple didn’t need to sink to the same lows.

While Apple and Epic are busy being Very Mature to each other, Google used the opportunity to try to quietly slip away from the coming altercation by also trying to dismiss the lawsuit from Epic. Google is clearly not jumping to Apple’s defense here, which makes sense considering there’s no small amount of bad corporate blood between the two giants.

Apple then filed a counter-suit for breach of contract stuffed with completely over the top eyeroll-so-hard-I-need-an-ophthalmologist language, accusing Epic of literally installing a Trojan Horse on the AppStore. Apple’s continued petulance included an attempt to turn off Apple sign-in for Fortnite, then a quick backtrack after Apple users wielded their virtual pitchforks and torches.

Meanwhile, Epic went on NPR to cast itself as a champion of the people, arguing how this is totally all about the good of the people and totally nothing to do with Epic making a crap-ton more money. Totally serial you guys. They pinky swear.

Most recently, a court date has been set for May 3rd, 2021. Who knows what’s going to happen in the meantime, but I think it’s fair to expect more tween-level interactions from these two companies along the way.

What’s the impact?

The lawsuit could have dramatic impacts across both mobile OS and gaming spaces. The assertion that Apple iOS is a market and subject to antitrust laws will have repercussions across all app stores, including PlayStation, Steam, and Microsoft, not to mention Google and iOS and beyond.

Personally, I think Apple is fighting a losing battle. It has exploited this loophole that the law wasn’t equipped to handle for a long time. This battle was always going to happen; it was just a question of when. Apple has always employed borderline draconian tactics in protecting its walled garden, and now it is reaping the consequences of that. Epic’s case is legally strong, and Apple has backed itself into the corner with its aggressive walled-garden approach. It’ll have a hard time arguing that it isn’t a valid antitrust market and an even harder time justifying why its payment processor is the only possible one to use on the AppStore.

While nobody can fully predict the outcome of the case, I suspect Apple will lose the case and ultimately be required to allow competing “AppStores” on iOS and competing payment processors. Other AppStore operators will have to make similar moves, including Epic itself, though the degree of impact will vary. Google already allows competing AppStores, for example.

It’s also clear that Apple is making a play to apply the AppStore model more definitely for its desktop and laptop computers. Apple Silicon, which is Apple switching from Intel chips to ARM chips, will make it easier (aka seamless) for developers to launch apps on iOS and Mac. The fun side effect will be how easy it will be to apply the AppStore lockdown on those full-fledged computers. This is purely my speculation, but I would guess Apple is going all-in on this AppStore model and planning on rolling it out wider to further lock down Mac systems with the release of Apple Silicon. This case is a huge deal for the company.

For consumers, we’ll see more diversity in games and apps on the iOS app store, along with more payment options. Google and Apple will be forced to lower their 30% charges to compete with other payment processors that will undoubtedly be lower. Consumers will likely end up paying slightly less in the long run while Apple tries to find a new way to exploit whatever new legal precedent is set.

It’s worth noting that Apple has played this game before in the eBook market – and lost. Hard. In my semi-informed opinion, this paints a bleak picture for Apple as we know it. But I think the net result will be a gradual renaissance in the binary stalemate between iOS and Android, and that can only benefit consumers.

It’s impossible to say what will come next because there’s a lot on the line for a lot of different groups. But as we’re sitting here, watching the South African coastline go by from the deck of the golden yacht, it’s guaranteed to be a fun ride.

Every other week, Andy McAdams braves the swarms of buzzwords and esoteric legalese of the genre to bring you Massively OP’s Lawful Neutral column, an in-depth analysis of the legal and business issues facing MMOs. Have a topic you want to see covered? Shoot him an email!
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