Gamers Lead Fight for the Future of the Mobile App Marketplace at the Supreme Court: Epic Games v. Apple Overview and Implications
Since its release in September 2017, the mega-popular video game “Fortnite” has had four different “chapters,” or time periods for players to engage in competitions, earn rewards, and purchase in-game add-ons.[1] While gamers have been battling throughout these Fortnite chapters in the virtual world, Fortnite’s creator has been engaged in a few different chapters of its own battle in the real world.
In September 2023, almost exactly six years after its release, Fortnite’s owner, Epic Games, petitioned the Supreme Court to review a significant lawsuit that could determine both the future of Fortnite on smartphones and the future of the mobile application marketplace.[2]
At a high level, Epic Games sued Apple for various claims of federal antitrust law violations.[3] The lawsuit, in large part, focuses on challenging the revenue-sharing requirements for application developers marketing their apps within the Apple App Store.[4]
While some see this lawsuit as just one giant technology company trying to avoid paying fees to another giant technology company, the outcome of this case has far more significant implications for developers, consumers, and the mobile app marketplace overall.
What are these Companies Fighting About?
App developers must comply with several technical requirements that each company lays out for an app to remain listed on the Apple (or Google) mobile app stores.[5] The source of this specific controversy comes from the long-time Apple and Google policies mandating revenue-sharing with applications that offer purchase options within their apps.[6] Generally, app developers get especially frustrated by two things: (1) revenue-sharing requirements and (2) anti-steering restrictions.
(1) Revenue-Sharing Requirements
Known pejoratively by many as the Apple “Tax,” the Apple App Store policy requires that application developers share revenue with Apple for any “in-app payments” (IAP).[7] Apple and Google have taken a similar 30% financial cut of in-app payments for years.[8] Accordingly, Apple restricts the type of “in-app purchase” to its own systems and says that “if you want to unlock features or functionality within your app (by way of example: subscriptions, in-game currencies, game levels, access to premium content, or unlocking a full version), you must use in-app purchase.”[9]
(2) Anti-Steering Provisions
Apple App Store guidelines also prohibit apps from steering users to payment platforms outside the Apple ecosystem.[10] “Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchase mechanisms other than in-app purchase.”[11] Known as the “anti-steering” provision, this restriction prevents any app developers (who are not given a limited “reader” exception by Apple) from linking or advertising on their mobile app to sign-up platforms elsewhere, such as on a computer.[12] For a while before being granted a limited “reader” exception, Netflix, for example, had a simple “[y]ou can’t sign up for Netflix in the app. We know it’s a hassle” message on its mobile phone application.[13] Similarly, Spotify shifted its business model in 2016 to avoid the Apple “Tax” by requiring users to make subscription changes on Spotify.com instead of within the mobile app.[14] As such, many app developers not granted exceptions face the difficult choice of either agreeing to these fees and restrictions or risking their app’s removal from the Apple App Store altogether.
Where does a Video Game Maker Come into Play?
Via their Fortnite mobile game, Epic Games provoked such Apple App Store removal in 2020 after they introduced their own in-app payment system that prompted Fortnite users to pay for in-game credits separately.[15] Predictably, Apple then removed Fortnite from the App Store, prompting Epic Games to file suit.[16] Epic Games also simultaneously launched a public opinion campaign to broadly protest the App Store’s restrictive conditions.[17] In conjunction, Epic Games solicited support from other companies frustrated by the “Apple Tax,” leading to public backing by Spotify and the Match Group.[18] Together with these supporting companies, Epic Games founded the Coalition for App Fairness (CAF) lobbying group, which is pushing US lawmakers to draft a version of the “Open App Markets Act.”[19] This proposed bill explicitly prohibits major app marketplaces like the Apple App Store and Google Play from restricting third-party in-app payment mechanisms.[20] To enhance their lobbying efforts, the CAF also released polling data in 2022 suggesting that 79% of voters support the Open App Markets Act.[21] Because the bill is just a draft, it will be imperative to track any legislative progress of potential app marketplace regulations that Epic Games and its supporters will continue to push toward in 2024 and beyond.
What about the Epic Games v. Apple Legal Battle So Far?
While the legislative battle continues, the court fight regarding Epic Games’ 2020 lawsuit has also persisted. In September 2021, a lower federal court in California provided a split decision mainly in Apple’s favor.[22] The Court granted Epic Games victories on its anti-steering claim but defeat on its nine other monopoly and anticompetitive behavior claims.[23]
Regarding the anti-steering claim, the Court issued a nationwide injunction enjoining Apple from prohibiting developers from including “in their Apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to IAP.”[24] The injunction also mandated that Apple not prohibit developers from “[c]ommunicating with customers through points of contact obtained voluntarily from customers through account registration within the app.”[25] This injunction handed a temporary win to Epic Games, as well as many other App Store developers, by enabling them to communicate more directly on their apps with consumers about purchase pricing.
On appeal in April 2023, the Ninth Circuit affirmed much of the lower court’s decision and handed Apple victory again on nine of the ten claims.[26] Notably, Epic Games prevailed again on their anti-steering claims, and Apple was ordered to comply with the lower court’s injunction.[27] However, after the Ninth Circuit’s decision, Apple has been granted a temporary stay for complying with this injunction until the Supreme Court decides to hear this case.[28]
As expected, on September 27 and 28, 2023, both Epic Games and Apple petitioned the Supreme Court to review the case, with Epic Games seeking to revive their anticompetitive behavior claims and Apple hoping to preserve their anti-steering App Store requirements.[29]
What are the Possible Case Outcomes?
While there are several potential outcomes, including a possible (but unlikely) settlement between Epic Games and Apple while they await the Supreme Court’s decision, below are some significant, high-level outcomes and their implications.
If the Supreme Court rejects cert altogether, then Epic Games will lose nine of the ten claims, but the Apple anti-steering injunction will take effect immediately.[30] This outcome would be a substantial loss to Epic Games as well as those pushing for broader app marketplace changes and reductions in their perceived monopolistic behavior by Apple and Google. The ruling would also be a major blow to Apple’s $72+ billion in annual app payment volumes in that it could require a substantial business model adaptation.[31] Apple could likely expect future in-app payment revenue to decline substantially as app developers would begin pushing their users to make payments outside the Apple ecosystem at cheaper rates.[32]
If the Supreme Court grants cert, upholds the lower court rulings, but overturns the anti-steering injunction, then Apple would resoundingly win on all fronts. This outcome would likely shut down many avenues for future judicial relief in contesting the Apple and Google app store revenue-sharing business models. However, legislative progress could still continue over the next few years if public and political pressure on technology companies is sustained.[33]
If the Supreme Court grants cert and then overturns many of the lower court rulings regarding Apple’s monopoly behavior, then Apple would lose big. If the Court finds any antitrust violations, it could force Apple to cede control and profitability over many aspects of its App Store.
What are the Broader Implications of this Fight?
As evidenced by the discussion above, this App Store feud is playing out not just in the courts but also in Congress and the public’s eyes. Regardless of whether the Supreme Court grants cert in this case, this fight will likely still have important ramifications on how mobile phone app marketplaces exist in the future. For years, some criticized Apple and Google as de facto regulators of the global mobile application marketplace with too much power.[34] On top of this lawsuit and others like it, these companies face existential threats to their app business models through domestic and international government regulatory efforts fueled by competitors and general public criticism.[35] If seismic shifts in the app marketplaces do occur through the courts, legislation, or public pressure, it is not clear yet who will benefit and who will bear those costs. If app developers promote cheaper sign-up or feature options outside conventional in-app payment systems, consumers could see price reductions. According to Epic Games CEO Tim Sweeney, there could also be greater economic competition if the “30% tax” savings could be passed onto consumers.[36]. As such, app developers would likely benefit financially from fewer app marketplace restrictions, as it would limit the revenue sharing required with Apple. However, Apple warns that app review quality could go down, and there could be security risks if developers do not “uphold the same rigorous standards of privacy, security, and content as Apple.”[37] Apple CEO Tim Cook exclaimed that allowing developers to implement their own payment systems would turn the Apple App Store into a “flea market, and you know the confidence level you have at the flea market.”[38] Furthermore, even if app marketplaces are forced into less revenue-sharing, developers and consumers could ultimately see other new transaction costs passed onto them by Apple and Google through new, different restrictions.
What’s Next?
As this important multifront battle continues, Epic Games is pressing on with a new release of an “OG” Fortnite game chapter.[39] While gamers dive in now, ultimately, Epic Games, Apple, Google, Congress, app developers, consumers, and many more interested parties will likely have to wait until January of 2024 to see if there will also be another legal chapter of this app marketplace fight.[40]
Footnotes
