Goliath vs Goliath in the Mobile App Industry

mobile-apps-industry

Will Epic Games v Apple finally create a level playing field for mobile apps?

Every startup beginning its journey is on a quest for market dominance. Yet, a select few firms have done so well in this mission that they now face mounting legal challenges for alleged monopolistic and anticompetitive behavior. This, of course, refers to the The Big Four – Google, Amazon, Facebook, and Apple – which are now accused of dominating tech industry sectors including ecommerce, search engines, and social media.

The latest House Judiciary subcommittee report on antitrust pointed out that Apple has “monopoly power” over software distribution on iPhones, which allows it to generate considerable profits from its App Store and extract rents from app makers. The report also acknowledged that Apple’s ecosystem has produced benefits for both customers and developers, but recommended major changes nonetheless.

This year, after summoning leaders of Big Tech companies including Google, Amazon, Facebook, and Apple – commonly abbreviated to GAFA – to an investigation hearing, the U.S. Department of Justice moved to file lawsuits against them for anti-competitive practices.

Apple came under particular fire for allegedly monopolizing the mobile app market. The company is now facing both public litigation from the State and private legal challenges, but the one that’s made some of the biggest headlines is the company’s ongoing legal battle with video game developer Epic Games.

Epic Games v Apple

Epic, which is behind the phenomenally-popular ‘Battle Royale’ game Fortnite, brought the lawsuit after being kicked out of the App Store for violating Apple’s internal policy. Epic had launched a direct payment system on its own online store, Epic Games Store, in an attempt to get around the App Store’s in-built purchase system and thus avoid paying Apple 30% commission on transactions.

The move was doubtless a blatant challenge to Apple. Perhaps foreseeing the consequences of being kicked out of the App Store, Epic Games filed the lawsuit just minutes after Apple’s retaliation and took proactive measures to market the lawsuit to the public.

The company ignited the #FreeFortnite campaign with a parody of Apple’s iconic “1984” commercial, in which Apple is depicted as the villain in the Fortnite world. In an interview with the New York Times, Tim Sweeney, Epic Games’ CEO, compared the company’s battle to a civil rights struggle. The intention behind this crusade is clear enough: the company was trying to mobilize its diehard fans into boycotting Apple or otherwise expressing their malcontent.

The legal challenge echoes previous skirmishes between Apple and app developers such as Spotify and Match Group (which owns dating app Tinder). Spotify, in particular, labeled the App Store fee an “app tax” and criticized Apple’s policy for stifling competition in the mobile app market.

Interestingly, Spotify is now available on the Epic Games Store. The company’s move is particularly intriguing given its ongoing lawsuit against Apple. More importantly, it could also be signaling Epic’s plans to turn its pure game store into a general app market, just like the App Store.

For its part, Apple responded with a counter-claim against Epic Games for breaching its contract and denied the allegations of monopoly.

“In the dark hours of the night, Epic launched its underhanded scheme to breach its agreements and free ride on Apple’s investments,” the company wrote in the filing.

Apple also questioned Epic Games’ motives for using the lawsuit as a publicity stunt.  Since the beginning of the August lawsuit, Epic Games has been engaged in promoting a boycott of Apple products and initiating the “free Fortnite” campaign.

The likelihood of winning the case

At present, analysts are predicting a win for Apple. It is not the first antitrust lawsuit the company has been forced to field, and it has emerged largely unscathed from previous battles. If Epic Games wins the case, it will be a rare success in the history of antitrust claims brought against Big Tech.

Analysts also pointed out that the alleged harm to market competition is likely to be overstated. Additionally, they said, Apple has a trump card up its sleeve: the company’s dedication to safeguarding users’ privacy may justify its need for control over apps being installed on Apple devices.

Thomas Cheng, an Assistant Professor at the University of Hong Kong’s law school and a former U.S. antitrust lawyer, predicts that the dispute will center on the definition of  ‘the mobile app market.’ Apple and Epic are likely to approach this definition in different ways to make their cases stronger.

On Apple’s part, Cheng says, the company may want to define the mobile app market as one that encompasses other smartphone manufacturers as well. According to a report by Statista, iPhone users accounted for around 45% of the total market share of smartphone users in the U.S. in 2020 – a significant chunk of the market, but not all of it.

“In U.S. [antitrust law], the consensus is you probably need at least 70% market share in order to trigger Section 2 [of the Sherman Act],” Cheng explains. Though this may seem like another avenue for Apple to come out on top, Cheng emphasizes that this isn’t the only way to define the mobile app market.

“Epic Games would define the relevant market as ‘app sales to iPhones,’ and in that market, Apple would have 100% market share because you can only sell apps to iPhone users through the App Store,” he says.

According to Cheng, defining it this way is acceptable because app developers can only access a given user if they have already chosen a smartphone.

“If your users have already purchased an iPhone, the only way you can get to them is through Apple’s App Store,” Cheng adds.

Apart from proving its own claim regarding Apple’s dominance over mobile app market share, there is another hurdle for Epic Games to overcome: identifying specific instances of anti-competitive practices.

“Whatever theory of harm Epic Games can come up with at the end of the day, the crux of its complaint is that Apple charges an excessive commission,” Cheng says. “Ultimately, this is really just a dispute about prices between two commercial entities, and U.S. antitrust law is very hesitant to intervene in a situation like this.”

Moreover, while the result of the lawsuit is anyone’s guess right now, Cheng said such suits are commonly used in the commercial world to spark business negotiations with companies that would otherwise remain inflexible. Epic may be hoping to simply start a conversation with Apple in order to negotiate a better deal.

And though the courtroom battle rages on, Apple already seems to have made a concession. In late November, Apple announced a reduction in App Store commissions from 30% to 15% for app developers who are making less than $1 million annually, in an attempt to promote indie app developers and innovation in the market.

But app developers were not impressed by Apple’s move. Epic Games and Spotify, the most vocal of Apple critics, criticized the tech giant’sApple’s act as an attempt to dodge anti-competition accusations.

The mobile app market is a winner-take-most business. As indicated by SensorTower, the top 1% of popular apps account for 93% of App Store sales in 2019. Under the new policy, 98% of developers are likely to benefit, but they only accounted for 5% of App Store revenue last year.

Apple did not reveal how much revenue it would forgo after the commission cut, but it is unlikely to be much since apps that really bring in profits are still subject to a higher commission.

Still, the new decision was welcomed by the App Association, an industry group that represents 5,000 app makers, which agreed with Apple that the change in policy benefits small businesses and promotes innovation in the market.

The future of legal reform and other measures

History has proved that it is difficult to bring a Big Tech firm down with monopolistic claims under current antitrust law.

Regulators and academics have put forward varying suggestions, ranging from legal reform to the dismantling and sale of Big Tech companies (‘selling them for parts,’ so to speak), but the viability of these proposals remains in doubt.

Cheng points out that the suggestion of breaking up Big Tech, while tempting in theory, is less viable in practice – especially in the context of Apple.

“One thing great about the iPhone is that it is a fully integrated ecosystem and things work seamlessly,” he says. “That’s why Apple’s products have such a high usability… because everything is designed in-house.”

In this regard, Cheng believes it would be difficult to separate iPhone from the rest of the Apple ecosystem, for it would lose its synergy.

“It requires a lot of careful thinking to even contemplate breaking up these companies, because you need to understand what is the ultimate source of market power of each company and how their businesses interact with each other,” said Cheng.

Antitrust law, as an age-old legal notion, might no longer be an apt solution in modern times, especially when the tech industry has evolved to an extremely high level of complexity. In fact, the law’s stringent threshold largely works in favor of tech companies and makes it difficult to win an anti-monopolization case in the U.S.

A possible legal alternative is to create sector-specific regulations that target tech companies. The EU is working in this direction, although previous attempts to penalize Google for anti-competitive behavior have often backfired in the company’s favor.

Regulating Big Tech is a challenge in that they operate in a space where there is little precedent. The kind of activity that needs to be regulated is also often technically complex, making it harder for lawmakers to understand the scope of the issue. As a result, the first question that needs to be answered is, what is to be regulated?

“Legislation does not say ‘we only regulate specific companies;’ the scope of regulation is always defined by some more objective criteria,” Cheng points out.

Indeed, people are so used to summing up Apple, Amazon, Google and the like as “Big Tech” that it is easy to forget they are, by nature, vastly different businesses. Apple is an electronics company, Amazon is an ecommerce platform, Google makes most of its profit from its search engine, and Facebook is a social media platform.

When dominance is dispersed across different sectors, it is not easy to come up with appropriate regulatory responses and remedies. For instance, if a sector-specific regulation is to be applied to Apple, the law would most likely impact all other companies of equivalent nature, such as Samsung and Huawei.

“I think it will be quite difficult to draft the objective criteria in such a way that we don’t impose unnecessary regulatory burdens on companies that we are not really interested in,” says Cheng.

The mobile app market isn’t going anywhere but up. A report from app analytics firm App Annie found that consumers spent an average of 3 hours and 40 minutes on mobile in 2019, a 35% increase from 2017. Thus, ensuring a level playing field will be an important challenge in years to come, for it will affect technological innovation as well as sustainable development within the industry.

Though the battle between Epic Games and Apple may not be your classic David and Goliath fight, it serves a reason for the industry and regulatory bodies to take a pause to reflect upon the current system, and search for any possible reforms that benefit all competitors – both the top dogs and the underdogs.

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