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Epic Games' app store lawsuit unlikely to take bite out of Apple, Google

Epic Games Inc.'s court challenge to the control that major app store developers Apple Inc. and Google LLC wield over their mobile storefronts is likely to take years to resolve, and the game developer stands to lose more than the tech companies in the near term, analysts said.

Epic, the creator of the popular video game Fortnite, appears to have willfully violated the terms of Apple and Google's App Store policies by launching its own in-game purchasing feature that sidesteps the companies' store payment process and the 30% commission that the tech companies charge for it. The gaming company offered a discounted rate for customers to pay directly versus through the app stores. Apple and Google responded by dropping Fortnite from their respective app stores, prompting Epic to file a pair of lawsuits and launch a social media campaign defending its position with its users.

"Epic was very much obviously ready for this," said Evan Niu, a technology analyst at financial advisory firm The Motley Fool, in an interview. "They put out this entire social media marketing campaign, they filed a lawsuit that was obviously ready to go. But at the same time, they made themselves look like the victim because Apple and Google are the ones that kicked them out."

This is not the first time a developer has attempted to challenge the practice or pricing of app store payments, analysts note. It is also not a fight that either Apple or Google is likely to back down from easily.

Mounting criticism

Streaming music service Spotify Technology SA in 2019 filed an antitrust complaint with the European Commission on grounds similar to Epic's recent lawsuit. Spotify alleged that Apple's app store requirements limit consumer choice and stifle developer innovation. European regulators are currently investigating Apple's developer requirements.

More recently, Basecamp, the developer of a $99-a-year premium email service called Hey, accused Apple of "acting like gangsters" in holding up an update with bug fixes to its app because of a lack of an in-app purchase option. The parties eventually compromised, with Apple allowing the rejected update to release while Basecamp worked to create a version that met Apple's payment requirements. Apple later amended the rules to allow developers to formally appeal violations of App Store guidelines and promised not to delay future app updates with bug fixes over guideline violations.

One key difference between Apple and Google's respective app store policies is that Apple maintains more of a walled-garden approach to the apps that can be downloaded and installed onto its devices, while Google permits outside apps to be downloaded to Android devices and also allows third parties to run their own app marketplaces.

The distinction puts Google at slightly less legal risk compared to Apple, noted Niu. Still, Epic alleges in its lawsuit that there is no viable substitute for distributing Android apps through the Play Store because Google uses a range of "contractual and technical barriers" such as "intimidating messages and warnings" that are shown to users who try to install apps from outside sources.

While the free-to-play Fortnite game has a sizable consumer following, Evercore ISI analyst Amit Daryanani estimated that the game accounts for only about $30 million of Apple's $4 billion in total App Store revenue, making the game's removal immaterial to Apple's overall mobile store.

By comparison, the Google Play version of Fortnite has generated approximately $937,000, according to data from Sensor Tower. The game debuted on Google Play in April after Epic surrendered its yearslong battle with Google to evade the company's app store policies by making Fortnite available elsewhere on Android devices.

Epic Games in an Aug. 17 tweet said Apple has given the company until Aug. 28 to comply with its App Store policies, or else Apple will terminate all of its developer accounts and cut Epic off from its iOS and Mac development tools. Epic Games CEO Tim Sweeney in an earlier tweet said the aim of Epic's legal action against Apple is to achieve "basic freedoms" for all consumers and developers to do business with whomever they choose.

The company's legal filings note that Apple and Google both control the primary platform for purchasing mobile apps for iOS and Android users, respectively. By contrast, Epic notes in its lawsuit that games can be purchased for Mac computers from any number of sellers, and the commission rate paid to Apple is much lower.

'Vetted' ecosystem

Apple's App Store is included within the company's broader services business, which also comprises Apple Music, video services and cloud offerings. While Apple does not provide specific sales figures for the App Store, net sales in the company's services business came to $13.16 billion for the June quarter, up from $11.46 billion a year ago. Services accounted for 22.04% of Apple's total net sales in the June quarter, down slightly from 22.9% in the March period.

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Apple's services segment is a key monetization tool for the company, which has successfully defended its business model in the past, noted Wedbush Securities analyst Daniel Ives. While the Epic court battle and its related social media campaign are likely to generate substantial attention for the case, Ives anticipates Apple will ultimately prevail.

"Apple has successfully defended its App Store moat again and again with this time being no different in our opinion," Ives wrote in a research note.

The U.S. Supreme Court in a 5-4 vote last year ruled that consumers were "direct purchasers" of apps from Apple's store and had the standing to sue Apple for antitrust practices. The court, however, did not provide a decision on key antitrust concerns raised by the Apple v. Pepper case.

Apple also has been under pressure from legislators, with Apple CEO Tim Cook recently called to testify about the company's App Store policies at a July U.S. congressional antitrust hearing. Cook contended that Apple treats all developers and consumers equally.

Avi Greengart, founder and lead analyst at market research and advisory firm Techsponential, said in an interview that the monopolistic claims lobbied against Apple and Google's respective app stores were somewhat overstated. Rather than harm, the control both companies assert over their services helps to safeguard user privacy and enables developers to thrive, he said.

"Having a vetted store environment with vetted payment options is not only more convenient for consumers but more secure," Greengart said in an interview. "That trusted environment ... adds value to consumers and to the ecosystem at large."