Epic Leaves a Big Crack in Apple’s Walled Garden

On Friday, after a contentious legal battle over Apple’s alleged monopoly power over the iOS ecosystem, a California judge snipped the tug-of-war rope between Apple and Epic Games. Both sides can claim some victory. Epic Games must pay over $3.5 million to Apple after violating its developer agreements by circumventing its payment processor. And Apple must change its App Store rules to allow developers to use other payment systems⁠—a blow to Apple’s iron grip on the iOS ecosystem.

Although both companies leave the lengthy trial with their own shreds of success, the fabric of Apple’s App Store could be forever changed. Soon, App store users could have a bounty of options to pay developers for their digital products—including, perhaps, some that don’t charge those developers a commission.

The $100 billion global market for mobile gaming is considered the most lucrative frontier for the games industry. Apple’s share of that market is huge⁠—over 55 percent, the court found. Much of that market power comes from Apple’s vertical integration of its systems: the Apple iPhones, the Apple App Store, and the Apple iOS operating system. If their apps are approved by Apple, developers have a platform to reach almost a billion iPhone users. But in exchange they have been required to use the company’s payment processing service for most digital transactions. What Epic took issue with, loudly and vigorously, was the 30 percent commission Apple skimmed off these purchases⁠—what the Fortnite developer called a “monopoly tax.”

When it filed its lawsuit against Apple last August, Epic claimed that the company had architected an “unreasonable and unlawful” monopoly in violation of antitrust laws. Apple, for its part, says it requires developers to use its payment system to ensure customers’ security and ease of use.

Apple’s 30 percent commission is standard, but not vital to its business operations. Maybe, it’s not even warranted. Late 2020, in part inspired by the suit, Apple launched its Small Business program, reducing that commission to 15 percent for developers earning less than $1 million through the App Store. (Other digital marketplaces, including Epic Games’, have lowered their commissions to 12 percent.)

Although Epic Games framed its crusade for a more open ecosystem as an ideological battle, US District Judge Yvonne Gonzalez Rogers cut through the $28.7 billion company’s publicity-speak in her Friday decision. “The size of this market explains Epic Games’ motive in bringing this action,” she wrote. “Having penetrated all other video game markets, the mobile gaming market was Epic Games’ next target and it views Apple as an impediment.” Despite its extraordinarily high profits, Apple, she found, does not monopolize the mobile gaming market in the eyes of federal antitrust law. She accepted Apple’s argument that its tight control over the App Store is vital for security and to differentiate iOS from the more laissez-faire environment of Android. “Success is not illegal,” she determined, rejecting Epic’s grand bid to force Apple to allow other app stores—like the Epic Game Store—to set up shop within iOS.

But Apple didn’t fare as well when Rogers turned her analysis to California’s Unfair Competition Law. Under that statute, Rogers concluded that Apple must stop prohibiting app developers from communicating to users, either within the app or outside of it, about alternative payment methods. That policy, she ruled, “illegally stifle[s] consumer choice” by hiding information from consumers, while unfairly shielding Apple from price competition.

If you’re having trouble seeing why the same conduct can count as anticompetitive under California law, but not federal antitrust law, you’re not alone. Multiple antitrust experts suggested that Rogers’ ruling is logically inconsistent.